Monthly Archives: January 2008

08ASTANA182, KAZAKHSTAN ECONOMIC AND ENERGY UPDATE, JANUARY 6 – 18,

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Reference ID Created Released Classification Origin
08ASTANA182 2008-01-31 01:50 2011-08-30 01:44 UNCLASSIFIED Embassy Astana

VZCZCXRO5510
RR RUEHLN RUEHVK RUEHYG
DE RUEHTA #0182/01 0310150
ZNR UUUUU ZZH
R 310150Z JAN 08
FM AMEMBASSY ASTANA
TO RUEHC/SECSTATE WASHDC 1630
INFO RUCPCIM/CIMS NTDB WASHDC
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RUCNCIS/CIS COLLECTIVE 0376
RUEHAK/AMEMBASSY ANKARA 2124
RUEHBUL/AMEMBASSY KABUL 0371
RUEHNE/AMEMBASSY NEW DELHI 0487
RUEHAST/USOFFICE ALMATY 0188

UNCLAS SECTION 01 OF 03 ASTANA 000182 
 
SIPDIS 
 
DEPT FOR SCA/CEN (O'MARA) 
DEPT PASS TO OPIC - BALLINGER 
DEPT PASS TO TDA FOR STEIN, EXIM FOR GLAZER 
DEPT PASS TO AID - EE-PHILLIPS/RUSHING 
TREASURY FOR OASIA/VELTRI 
USDOC FOR 4231/ITA/MAC/MLONDON, 4201/BISNIS 
USDOC FOR 6110/ITA/TD/BI/RHALPERN 
ANKARA FOR CFC 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON EIND ENRG EPET EFIN KTDB KZ
SUBJECT:  KAZAKHSTAN ECONOMIC AND ENERGY UPDATE, JANUARY 6 - 18, 
2008 
 
ASTANA 00000182  001.2 OF 003 
 
 
1.  Summary:  This information on economic and energy developments 
in Kazakhstan is drawn primarily from the local press, and has not 
been verified for accuracy. 
 
--   GOK Economic Policy in 2008 
-- New Appointments 
-- US Bank Provides Loan to Kazakhstani Partner 
-- Economic Statistics 
-- KazMunayGas Will Explore N Block on the Caspian Shelf 
-- KazMunayGas Secures Loan for Rompetrol Acquisition 
-- Power Loss Prevention Program to Be Implemented 
-- New Shell Country Chairman Assumed Duties on January 1 
-- Energy Statistics for 2007 
 
GOK Economic Policy in 2008 
--------------------------- 
 
2.  The Government of Kazakhstan (GOK), the National Bank of 
Kazakhstan (NBK) and the Financial Supervision Agency (FSA) approved 
a joint statement on the main directions of the country's economic 
policy.  According to preliminary estimates, Kazakhstani GDP growth 
in 2007 was 8.7 percent.  As a result of difficulties attracting 
external financing, the GOK is predicting a reduction in credit and 
only 5-7 percent GDP growth in 2008.  Priority tasks for the NBK and 
the FSA will be to maintain inflation at, or below, 10 percent, 
strengthen supervision and regulation of private banks, and provide 
private banks with short-term liquidity if necessary.  The GOK will 
continue to provide financing to construction companies through its 
development institutions.  This step will allow for the completion 
of many apartment buildings currently under construction in Astana 
and other regions of Kazakhstan.  (Kazakhstanskaya Pravda, January 
9) 
 
New Appointments 
---------------- 
 
3.  KazakhTelecom announced the appointment of Askar Yesengarayev as 
new Chairman of the Board of Directors. Yesengarayev previously held 
positions as the Managing Director of the Samruk State Holding and 
as Chairman of the Information Agency of the Republic of Kazakhstan. 
 KazakhTelecom dominates the Kazakhstani telecommunications market. 
The government owns approximately 52% of the company, which is 
managed by Samruk.  (Interfax-Kazakhstan, January 14) 
 
4.  Kazyna Sustainable Development Fund Deputy Chairman Maksat 
Kabashev has been selected Chairman of the Managing Board of the 
National Investment Fund (NIF) of Kazakhstan.  (Note.  NIF is one of 
the development institutions operating under the umbrella of Kazyna. 
 The Fund fosters the development and direction of industries in 
non-extractive sectors through direct investment and co-ownership of 
businesses. End Note.) He was replaced at Kazyna by Zeinulla 
Kakimzhanov.  (Interfax-Kazakhstan, January 15) 
 
US Bank Provides a Loan to Kazakhstani Partner 
--------------------------------------------- - 
 
5.  National City Corporation (USA) has authorized a $30 million 
loan to Kazakhstan-based TsentrKredit Bank (TKB), according to a 
January 8 TKB press release.  The loan was granted for seven years 
with a two-year grace period and will be spent on the development of 
the bank's retail business.  According to the press release, the 
U.S. Overseas Private Investment Corporation provided a loan 
guarantee.  (BBC Monitoring Central Asia, January 9) 
 
Economic Statistics 
------------------- 
 
6.  In 2007, agricultural output reached 1.07 trillion tenge (about 
$8.84 billion), having grown 8.4% in comparison with 2006.  The 
gross grain harvest rose 22% to 20.1 million tons in 2007. 
Production of meat was 1,504 million tons, a 4% increase over the 
1,446 million tons produced in 2006.  The production of milk 
increased by 2.9%, reaching 5,037 million tons.  Overall, livestock 
production in 2007 grew by 4% to 469.5 billion tenge (approximately 
$3.88 billion), and crop output increased by 12.7% to 600.1 billion 
 
ASTANA 00000182  002.2 OF 003 
 
 
tenge (about $4.96 billion).  (Interfax-Kazakhstan, January 15) 
 
7.  According to the National Statistics Agency, Kazakhstan's 
foreign trade surplus shrank by 5.6%, from $13.531 billion in 
January-November 2006 to $12.809 billion for the same period in 
2007.  Foreign trade grew 28.9% during that 11-month period to 
$72.349 billion, including a 22.3% growth in exports to $42.579 
billion, and a 39.8% growth in imports to $29.77 billion.  The top 
ten export destinations were Italy (16.3% of total exports), 
Switzerland (15.6%), China (12%), Russ
ia (10%), France (8.4%), 
Ukraine (2.4%), UK (2.1%), Turkey (2%) Uzbekistan (1.8%), and the 
U.S. (1%).  The top ten import sources were Russia (35.4% of total 
imports), China (10.7%), Germany (8%), the United States (5%), 
Ukraine (4.7%), Japan (4.3%), Italy (3.6%), Turkey (3%), the UK 
(2.3%), and France (2.2%).  (Interfax-Kazakhstan, January 15) 
 
KazMunayGas Will Explore N Block on the Caspian Shelf 
--------------------------------------------- -------- 
 
8.  Kazakhstan's Ministry of Energy and Natural Resources signed a 
Production Sharing Agreement (PSA) with Kazakhstan's national oil 
and gas company, KazMunayGas (KMG), to explore the promising N (or 
"Nursultan") Block on the Caspian shelf.  The N Block was discovered 
in the mid-1990's.  Its reserves are estimated at 600-700 million 
tons of hydrocarbons.  KMG experts believe that this block has more 
gas than oil.  The major complication in its exploration is its deep 
location below the sea (40 to 230 meters), which is expected to 
result in high extraction expenses.  Exploration work will start in 
the second half of 2008.  (Express-K newspaper, January 12) 
 
KazMunayGas Secures a Loan for Rompetrol Acquisition 
--------------------------------------------- ------ 
 
9.  KazMunayGas (KMG) has concluded a deal for a one-year $3.1 
billion syndicated loan from ABN Amro, Credit Suisse, and Calyon. 
The annual interest rate is LIBOR plus 0.9%.  The loan will be used 
to fund the acquisition of a 75% stake in Romania's Rompetrol Group 
N.V.  The acquisition will double KMG's refining capacity by 
providing access to two Rompetrol refineries in Romania and 
significantly increase its retail infrastructure by providing access 
to 630 filling stations in seven European countries.  (Interfax - 
Kazakhstan, January 10) 
 
Power Loss Prevention Program to be Implemented 
--------------------------------------------- -- 
 
10.  The State Agency for the Regulation of Natural Monopolies 
(AREM) has proposed that power companies seeking tariff increases 
submit a three-to-five-year power loss prevention plan.  According 
to AREM, today standard "technical losses" are 60% for water, 22% 
for electricity, and 33% for heat.  Compensation for standard 
technical losses consumes as much as 50% of tariffs, and therefore 
the implementation of power loss prevention programs should result 
in significant tariff reductions.  (Interfax - Kazakhstan, January 
16) 
 
New Shell Country Chairman Assumed Duties on January 1 
--------------------------------------------- --------- 
 
11.  Royal Dutch Shell Plc has appointed Campbell Keir as General 
Manager and Country Chairman for Shell Kazakhstan Development B.V. 
Keir was previously Managing Director for Shell Syria Petroleum 
Development, General Manager of the Al Furat Petroleum Company, and 
Country Chairman of Shell Syria.  Between 1999 and 2003, he worked 
as Managing Director for Shell Exploration and Production in 
Thailand.  Upon appointment, Keir established his priorities as 
working closely with KazMunayGas, continuing to expand Shell's 
program of local content development and social investment, and 
moving Shell's main office from Almaty to Astana by mid 2008. 
(Interfax - Kazakhstan, January 17) 
 
Energy Statistics for 2007 
-------------------------- 
 
12.  According to the National Statistics Agency, in 2007, 
 
ASTANA 00000182  003.2 OF 003 
 
 
Kazakhstan produced 55.5 million tons of crude oil (2.2% more than 
in 2006) and 11.9 million tons of gas condensate (11.6% more 
year-on-year.)  Natural gas production rose 15.7% to 16.6 billion 
cubic meters.  coal production fell 1.9% to 94.4 million tons. 
Electricity production grew 6.2% to 76.15 billion kilowatt-hours. 
(Interfax - Kazakhstan, January 15) 
 
13. Kazakhstan produced 6,637 tons of uranium in 2007, 25.7% more 
than in 2006. In 2008, the country plans to increase its production 
to around 9,600 tons of uranium.  (Press service of Kazatomprom, 
January 15) 
 
ORDWAY

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08ASTANA146, 2007 INVESTMENT CLIMATE STATEMENT – KAZAKHSTAN

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Reference ID Created Released Classification Origin
08ASTANA146 2008-01-29 09:12 2011-08-30 01:44 UNCLASSIFIED//FOR OFFICIAL USE ONLY Embassy Astana

VZCZCXRO3692
RR RUEHAST
DE RUEHTA #0146/01 0290912
ZNR UUUUU ZZH
R 290912Z JAN 08
FM AMEMBASSY ASTANA
TO RUEHC/SECSTATE WASHDC 1581
RUEHAST/USOFFICE ALMATY 0166

UNCLAS SECTION 01 OF 16 ASTANA 000146 
 
SIPDIS 
 
SCA/CEN - O'MARA 
EB/IFD/OIA 
 
SENSITIVE 
 
SIPDIS 
 
E.O. 12958:  N/A 
TAGS: ETRD EFIN ECON EINV PREL OPIC KTDB USTR
SUBJECT: 2007 INVESTMENT CLIMATE STATEMENT - KAZAKHSTAN 
 
REF:   A. 07 State 158802 
 
1.  The following information is provided in response to reftel 
request. 
 
Openness to Foreign Investment 
------------------------------ 
Kazakhstan has made significant progress toward creating a market 
economy since its independence in 1991. The European Union in 2000 
and the U.S. Department of Commerce in March 2002 recognized the 
success of Kazakhstan's reforms by granting it market economy 
status. Kazakhstan also has attracted significant foreign investment 
since independence.  By July 2007, foreign investors had invested a 
total of about $58.3 billion in Kazakhstan, primarily in the oil and 
gas sector, during the country's fifteen years of independence. 
Following independence, the government created a favorable regime 
for oil and gas investments at the same time that it undertook other 
liberalizing economic measures and began an ambitious privatization 
program. 
Despite continuously increasing investment into Kazakhstan's energy 
sector, concerns remain about a tendency on the part of the 
government to challenge contractual rights, to legislate preferences 
for domestic companies, and to create mechanisms for government 
intervention in foreign companies' operations, particularly 
procurement decisions. Together with vague and contradictory legal 
provisions that are often arbitrarily and inconsistently enforced, 
these negative tendencies feed an enduring perception that 
Kazakhstan is becoming less open to investment. 
Four major pieces of existing legislation affect foreign investment. 
These are: 1) the 2003 law "On Investment"; 2) the 1997 law "On 
Government Procurement;" 3) the 2001 Tax Code; and 4) the 2003 
Customs Code. These four laws provide for non-expropriation; 
currency convertibility; guarantees of stability in the legal 
regime; transparent government procurement; and incentives in 
certain priority sectors. However, inconsistent implementation of 
these laws and reforms at all levels of government remains the key 
obstacle to business in Kazakhstan. 
Since 1997, there has been a growing trend to favor domestic 
investors over foreigners in most state contracts. Furthermore, 
amendments passed in 1999 to the Oil and Gas Law require mining and 
oil companies to use local goods and services. According to these 
"local content" regulations, subsurface users in Kazakhstan are 
obligated to purchase goods and services from Kazakhstan entities -- 
provided that the local goods meet minimum project standards -- and 
to give preference to the employment of local personnel. Prospective 
subsurface users are required to specify in their tenders the 
anticipated local content of their work, goods, and services. Since 
2002, a designated government body must approve all tender 
documents, participate in tender committees, and approve all tender 
committee decisions, in order to ensure compliance. The 2005 
"Production Sharing Agreements (PSA)" law, which applies primarily 
to Kazakhstan's offshore oil development projects, binds companies 
to similar local context provisions. 
In December 2006, amendments to the Subsurface Law further tightened 
the government's application of local content requirements, 
requiring companies to meet local content benchmarks annually, 
rather than on average over the lifetime of a project. More 
recently, an amendment signed in October 2007 allows the government 
to annul contracts in the extractive sector if they are deemed to be 
harmful to Kazakhstan's economic security or national interests. 
President Nazarbayev, however, said publicly that the amendment 
would not be used retroactively, but rather only with respect to new 
contracts. (Note: The amendment was not invoked during recent 
negotiations to restructure the Kashagan field consortium.) 
These requirements are being challenged in connection with 
Kazakhstan's forthcoming WTO accession negotiations, as they appear 
to breach GATT and GATS rules and the Agreement on Trade Related 
Investment Measures. They also appear to contradict the 1994 
U.S.-Kazakhstan Bilateral Investment Treaty, which states in Article 
II, paragraph 5, that "neither party shall impose performance 
requirements...which specify that goods be purchased locally..." 
In January 2003 President Nazarbayev signed a new law "On 
Investments" that superseded and consolidated past legislation 
governing foreign investment. The law establishes a single 
investment regime for domestic and foreign investors, and provides, 
inter alia, guarantees of national treatment and non-discrimination 
for foreign investors. It guarantees the stability of existing 
contracts, with the qualification that new ones will be subject to 
amendments in domestic legislation, certain provisions of 
international treaties, and domestic laws dealing with "national and 
ecological security, health and ethics." 
The 2003 law provides for dispute settlement through negotiation, 
Kazakhstan's judicial process, and international arbitration. 
However, the law narrows the definition of investment disputes and 
lacks clear mechanisms fo
r access to international arbitration. U.S. 
investors should note that the U.S.-Kazakhstan Bilateral Investment 
Treaty, as well as the New York Convention, protects U.S. investor 
access to international arbitration. Additionally, the RK 
 
ASTANA 00000146  002 OF 016 
 
 
Constitution, as well as the 2003 law "On Investments," specifies 
that ratified international agreements have precedence over domestic 
law. The May 2005 Law on International Agreements appeared to 
contradict this legal hierarchy, setting precedence of domestic law 
of the RK over its international agreements  However, Kazakhstan 
amended this law in February 2007, eliminating this contradiction.. 
Finally, in December 2004 Kazakhstan adopted a law "On International 
Commercial Arbitration" (see "Dispute Settlement" for full 
discussion). 
The 2003 law contains investment incentives and preferences based on 
government-determined sectoral priorities, and provides for 
investment tax preferences, customs duties exemptions, and in-kind 
grants. The law also provides exemptions for customs duties on 
imported equipment/components if Kazakhstan-produced stocks are not 
available or do not meet international standards. 
Amendments since made to the 2003 law, which came into force in May 
2005, eliminate five-year corporate income tax exemptions and 
replace them with a modified set of ten-year exemptions. Customs 
duties exemptions are limited to equipment that is destined for use 
in production processes exclusively in Kazakhstan. 
In 2001, Kazakhstan adopted transfer-pricing legislation, which 
gives tax and customs officials the authority to monitor 
export-import transactions in order to prevent the understatement of 
earnings through manipulation of export prices. Foreign investors 
are concerned that the government specifically rejected the use of 
OECD standards for determining a proper market price under the 
transfer-pricing legislation, creating instead a methodology that 
fails to fully account for all cost and quality differences. The 
government in effect holds that transfer-pricing can take place even 
in transactions between unrelated parties, because the practice is 
defined by transaction prices that differ from market prices by a 
certain percentage. Kazakhstan's deviation from international 
methodology on this complicates the ability of firms to obtain 
relief under treaties on avoidance of double taxation from their 
home countries. This remains a contentious issue with investors. 
Kazakhstani law holds that no sectors of the economy are fully 
closed to investors, although there are sectoral limitations, 
specifically a 20% ceiling on foreign ownership of media outlets and 
49% restriction on foreign ownership in the telecommunications 
sector.  However, a December 2005 law lifted the restrictions on the 
participation of foreign capital in the banking sector. A ban on 
foreign bank and insurance company branches remains in force. 
Finally, the 2005 Production Sharing Agreement law mandates that the 
state oil company be a minimum 50% participant in new offshore 
projects. In practice, investors may find that a joint venture with 
a well-connected local partner is advantageous in navigating the 
legal and political complexities of operating in Kazakhstan 
Insurance supervision and licensing powers are exercised by the 
Financial Supervision Agency. February 2006 amendments to the Law on 
Insurance have eliminated participation restrictions for foreign 
legal entities in insurance and re-insurance organizations in 
Kazakhstan. 
Restrictions also exist on foreign ownership of land in Kazakhstan. 
See below (A.6 "Right to Private Ownership and Establishment"). 
The government plays a large role in overseeing foreign investment. 
Government officials, sometimes at the highest levels, screen major 
foreign investment proposals. 
In 2004, the government adopted amendments to the law governing oil 
and gas exploration, assigning to the state a right of first refusal 
on the purchase of shares in Production Sharing Agreements (PSAs) in 
the extractive industries. The law as written applies to 
pre-existing as well as future contracts and thus, in the 
government's view, supersedes any pre-emptive rights consortium 
partners might have negotiated in the original contracts. 
The "pre-emption law," which has its origins in the government's 
attempt to purchase British Gas (BG)'s stake in the Kashagan oil 
field, is a disturbing development in the area of contract sanctity. 
Although the government has not yet tested the law in practice, its 
apparent willingness to override contractual arrangements through 
fiat is discouraging. In 2005, the Kazakhstani government broadened 
its claim of priority purchase rights to include shares of companies 
that have invested in the oil and gas sector. The same amendments 
allow the government to block the sale of oil and gas assets in the 
interest of "national security." Additional amendments to the 
Subsurface Law signed in December 2006 also assign the government 
the right to exclude companies from participating in oil and gas 
investment program tenders if it is similarly considered in the 
interests of "national security." Tax experts consider Kazakhstan's 
tax laws to be among the most comprehensive in the former Soviet 
Union. The latest Tax Code, which entered into effect on January 1, 
2002, applies taxes universally and allows only a limited set of 
exemptions. The code applies an international model of taxation, 
based on the principles of equity, economic neutrality and 
simplicity. This code is an improvement over its predecessor and a 
step forward in establishing a transparent and effective tax system. 
Starting January 1, 2007, the value-added tax (VAT) will be set at 
14%, and the personal income tax rate increasing to 20%. 
Furthermore, employees' earnings are subject to a regressive "social 
 
ASTANA 00000146  003 OF 016 
 
 
tax," ranging from 7% to 20% for Kazakhstani employees and 5% to 11% 
for "foreign specialists." The corporate tax rate is flat at 30%. In 
addition to all taxes levied on Kazakhstani entities, non-residents 
must pay 15% of net income or 20% of commercial revenues. However, a 
non-resident might have a right to recuperate this money, if a 
relevant bilateral tax treaty exists and covers the respective tax 
provision. The Tax Code contains a description of this procedure. 
Certainly, this requirement creates unnecessary complications and 
impedes business activity. Foreign firms operating in Kazakhstan 
frequently report harassment by the Financial Police via unannounced 
inspections and other methods. In 1998, the government limited the 
number of visits that can be made by government bodies to small 
businesses in the course of a year, but tax inspections were 
excluded from this limitation. A "moratorium" on inspections of 
small and medium firms decreed in late 2002 has never been fully 
observed; it resulted in at 50% decrease in the number of audits, 
but, reportedly, no reduction in overall penalties assessed. The 
2002 Tax Code provides a basis for improvement because it limits the 
powers of tax authorities and defines the rights of taxpayers more 
clearly. 
It is important to note that in practice the application of tax laws 
has been une
ven, and in some cases blatantly unfair. This has been 
particularly true in cases where a company is involved in another, 
unrelated dispute with the authorities. Foreign investors have 
complained of a lack of evenhandedness in the authorities' 
application of other laws or regulations as well. In some cases, the 
investors have interpreted regulatory pressure as an effort to 
extract bribes. 
Investors should not assume that agreeing to a settlement with tax 
authorities following an investigation or civil case will prevent 
the pursuit of charges under criminal provisions. At times the 
authorities have used criminal charges in civil disputes as a 
pressure tactic. 
By law and in practice, foreign investors are allowed to participate 
in all privatization projects. There appears to be no discrimination 
against foreign investors after an investment is made. However, many 
foreign companies cite the need to protect their investments from a 
near-constant barrage of decrees and legislative changes, most of 
which do not "grandfather" existing investments. In addition to 
arbitrary tax inspections, foreign investors also complain of 
problems with closure on contracts, delays and irregular practices 
in licensing, land fees, etc. Some foreign firms have expressed 
concern that government organizations fail to live up to their side 
of the contract, particularly regarding payment. This often prevents 
the foreign partner from moving ahead with its investment program. 
When this occurs, the investor is exposed to government charges of 
non-performance and the real possibility that the government will 
cancel the contract. 
Foreign workers are required to have a work permit to work legally 
in Kazakhstan. Obtaining these work permits can be difficult and 
expensive. The government cites the need to boost local employment 
by limiting the issuance of work permits to foreigners. U.S. 
companies should consult legal firms for assistance (see A.5 for 
details) in obtaining work permits. The work permits quota system is 
based on the 1998 Law on Employment of the Population. Under this 
system, the government limits the number of work permits available 
to foreigners, based on the area of specialization and geographic 
region. Since 2001, the annual number of work permits has been 
subject to a government-established quota. In January 2003 the 
government issued a decree (no. 55) which sets forth new procedures 
for the annual determination of this quota. Local authorities submit 
estimates of the required number of foreign work permits for the 
upcoming year to the Ministry of Labor and Social Protection. The 
Ministry then establishes the quota and issues permits based upon a 
proven lack of qualified Kazakhstani citizens to fill the positions 
in question. In 2003 the government set the work-permit quota at 14% 
of the active labor force. The quota has steadily increased: in 
2005, 0.32%.; in 2006 0.55%, and in 2007 0.8%. The quota assumes an 
active labor force of 8 million people. 
 
Conversion and Transfer Policies 
-------------------------------- 
There are minimal restrictions on converting or transferring funds 
associated with an investment into a freely usable currency at a 
legal market-clearing rate. 
In 1996, Kazakhstan adopted Article 8 of the IMF Articles of 
Agreement, which stipulates that current account transactions, such 
as currency conversions or the repatriation of investment profits, 
will not be restricted. In 1999, the Government and National Bank of 
Kazakhstan announced that the national currency would be allowed to 
float freely at market rates, thus abolishing the previous managed 
exchange rate system. 
No distinction is made between residents and non-residents when 
opening bank accounts. There are no restrictions whereby different 
types of bank accounts are required for investment or import/export 
activities. For non-residents, money transfers in currency 
associated with foreign investments, whether inside or outside of 
the country, can take place without restriction. The National Bank 
 
ASTANA 00000146  004 OF 016 
 
 
permits non-residents to pay wages in foreign currency. Foreign 
investors may convert and repatriate tenge earnings made inside 
Kazakhstan. 
The National Bank has established procedures and licensing 
arrangements to cover bank payments and transfers relating to 
capital movements. Inward capital flows are basically unrestricted. 
However, a resident company in which there is foreign investment 
exceeding $100,000 must register the transaction for statistical 
purposes. There are restrictions on capital movements when a 
non-resident sells or disposes of an interest in a resident company 
to another resident company. These are dealt with under the 
licensing arrangements of the National Bank. 
The procedure for licensing foreign currency transactions related to 
capital movements is governed by Regulations Number 129 and 130 of 
the Procedure for Licensing Activities Related to the Use of Foreign 
Currency of April 24, 1997. 
In June 2005 the President signed the Law on Currency Regulation and 
Currency Control. This law lifted restrictions on money transfers: 
both residents and non-residents are allowed to take up to $10,000 
in cash out of the country without documentation of the money's 
origin. However, the transfer of cash amounts exceeding $3,000 must 
be declared; the transfer of amounts exceeding $10,000 must be 
accompanied by the certification of the National Bank. 
The following types of capital movements from residents to 
non-residents are subject to licensing: 
--investments of residents in the business of non-residents abroad. 
(The professional activity of authorized banks on the securities 
market -- e.g., broker and dealer activity with state securities of 
non-residents -- is exempted.); 
--transfers from residents to non-residents of property, including 
real estate transactions; and 
--the repayment of loans extended by residents to non-residents for 
a period of more than 180 days. (Obtaining licenses is sometimes 
very slow.) 
The Customs Committee and the National Bank require an "Import [or] 
export transaction passport," ostensibly for the purpose of currency 
control. The document, which re-states information from other 
documents, complicates import and export processing. There is a real 
question whether the law is effective for its stated purpose - to 
ensure that the proceeds from export sales are returned to 
Kazakhstan, and to prevent money laundering and fraudulent 
over-invoicing of imports. 
In July 2006, Kazakhstan adopted an amendment to its Customs Code, 
requiring submission of  export declaration forms of country of 
origin for bringing goods into Kazakhstan.  This resulted in an 
unintentional virtual shutdown for imports from many countries, 
particularly from the United States.  The July amendment was 
repealed in November, ending the problem. 
The U.S. Embassy is not aware of any concerns with regard to 
remittance policies or availability of foreign exchange for 
remittance of profits. 
In 2001, the government announced an amnesty for all Kazakhstani 
citizens repatriating cash or transferring money during a 30-day 
period. The legalized money was not taxed and became available to &#x000A
;its owners at the end of the amnesty period. Kazakhstanis 
repatriated $480 million under this amnesty, of which almost 90% was 
brought to banks in the form of cash.   Another amnesty, which 
concluded on August 1, 2007, resulted in legalization of nearly $7 
billion in property. 
Based on rules adopted in late 2005 relating to the control of 
currency turnover and capital flows, the National Bank regularly 
monitors currency operations of selected non-residents. This 
procedure primarily affects the following sectors: the oil and gas 
industry, construction, mining, as well as companies providing 
architectural, engineering and industrial design services. According 
to the National Bank, this monitoring will furnish the National Bank 
with better statistical data on the balance of payments and external 
debt. 
 
Expropriation and Compensation 
------------------------------ 
The Investment Law of 2003 represents a step back from the clarity 
of the 1994 law with regard to expropriation and compensation. The 
2003 law allows nationalization by the state in cases "as provided 
in legislative acts of the Republic of Kazakhstan." Unlike the 1994 
law, it does not provide clear grounds for expropriation. Similarly, 
the 1994 law required "prompt, adequate and effective" compensation 
at fair market value, with interest. The new law differentiates 
between nationalization and requisition, providing full 
indemnification of the investor in the case of the former, but only 
payment of market value in the case of the latter. Bilateral 
investment treaties (BITs) between Kazakhstan and other countries, 
including the U.S., also refer to compensation in the event of 
expropriation. 
There has been one case of legal expropriation of a foreign 
investor's property for public purpose. The investor ultimately 
submitted the case for international arbitration. In May 2006, after 
lengthy delays and negotiations, the government paid the amount 
 
ASTANA 00000146  005 OF 016 
 
 
awarded by the arbiter. 
Some foreign investors have encountered serious problems short of 
expropriation. In one instance, in 1996, three foreign companies 
were forced to relocate their offices under pressure from the 
government. In 1997, investors, after reviving an important mine, 
found they could not obtain export licenses for their ore, although 
the right to export was written into their contract. The same year 
another investor alleged forgery and fraud by government officials, 
claiming its employees had been physically threatened in a 
management dispute at its ferro-alloy venture in northern 
Kazakhstan. 
The Embassy is aware of one case, in 1992, of government action 
tantamount to expropriation, when a U.S. company was deprived of its 
rights to explore and develop an oil deposit in Atyrau Oblast. In 
1999, the Stockholm Arbitral Court found that the government's 
action was tantamount to expropriation. After the U.S. Embassy 
raised the case with the government, it paid in full the amount of 
compensation called for in the arbitral award. 
 
Dispute Settlement 
------------------ 
There have been a number of investment disputes involving foreign 
companies in the past several years. While the disputes have arisen 
from unrelated, independent circumstances, many are linked to 
alleged breaches of contract or non-payment on the part of 
Kazakhstani state entities. Some disputes relate to differing 
interpretations of joint-venture agreement and production sharing 
agreement (PSA) contracts; one questions the legality of the 
government's use of ex-post facto regulations governing value added 
taxes. The disputes involve, in some instances, hundreds of millions 
of dollars.   A recurring theme remains the unpredictability of 
actions taken by tax authorities and other regulating agencies. 
Kazakhstan is still in the process of building the institutional 
capabilities of its court system. Until this is complete, the 
performance of courts in the country will be less than optimal. 
Problems also arise in enforcing judgments. Given a relative lack of 
judicial independence, there is ample opportunity for interference 
in judicial cases. 
General commercial law principles are established in Kazakhstan's 
Civil Code. 
The 2003 law "On Investments" defines an investment dispute as "a 
dispute ensuing from the contractual obligations between investors 
and state bodies in connection with investment activities of the 
investor." It states that such disputes can be settled by 
negotiation, in Kazakhstani courts, or through international 
arbitration. According to the law, disputes not falling within the 
above-noted category "shall be resolved in accordance with the laws 
of the Republic of Kazakhstan." While some investors find this 
legislation problematic since it does not address disputes between 
private entities, others believe that Kazakhstan's Civil Code and 
Civil Procedure Code provide private parties with recourse to 
foreign and/or third party courts. 
Additionally, in December 2004, Kazakhstan adopted a law on 
international arbitration. The law appears to give broad authority 
for judicial review of arbitral awards in Kazakhstan. An early test 
case yielded decidedly mixed results. In 2005, a U.S. company became 
embroiled in a dispute over payment for the sale of its shares in a 
joint venture to a group of Kazakhstani companies. The London Court 
of International Arbitration (LCIA) issued a preliminary ruling 
ordering that the shares be frozen pending its final decision. The 
acting Kazakhstani court, however, ignored the LCIA's ruling, and 
proceeded with its own hearings. The case was ultimately decided by 
the Supreme Court of Kazakhstan in the U.S. company's favor. In 
January 2006, however, the Astana City Court relied on an 
international convention loophole to decline the LCIA's award of 
legal costs to the U.S. firm on the grounds that doing so would be 
detrimental to "public order" in Kazakhstan. In May 2006, that 
decision was overturned, and the legal costs were awarded. 
Kazakhstan has been a member of the International Center for the 
Settlement of Investment Disputes (ICSID) since December 2001. 
Any international arbitral award rendered by the International 
Center for the Settlement of Investment Disputes (ICSID), any 
tribunal applying the United Nations Commission on International 
Trade Law Arbitration rules, the Stockholm Chamber of Commerce, the 
London Court of International Arbitration, or the Arbitration 
Commission at the Kazakhstan Chamber of Commerce and Industry 
should, by law, be enforced in Kazakhstan 
The U.S.-Kazakhstan Bilateral Investment Treaty can serve to 
buttress the law "On Investment" in this area. Kazakhstan ratified 
the New York Convention on the Recognition and Enforcement of 
Foreign Arbitral Awards in 1995. 
Creditor rights are set forth clearly under the current law on 
bankruptcy. However, the 1997 bankruptcy legislation is hindered by 
its complexity and numerous subsequent amendments, resulting in 
considerable misapplication in practice. The Committee on Work with 
Insolvent Debtors, operating under the umbrella of the Ministry of 
Finance, is Kazakhstan's official bankruptcy agency. 
The Law "On Bankruptcy" approved in 1997 was amended in May
 2007. 
 
ASTANA 00000146  006 OF 016 
 
 
It contains a detailed list of creditors' rights and prescribes a 
mechanism for their enforcement. Monetary judgments are normally 
made in domestic currency. 
In general, the Government of Kazakhstan has a mixed record of 
addressing investment disputes. Foreign investors have often had to 
endure protracted negotiations. Most investors prefer to handle 
investment disputes privately, rather than make their cases public. 
 
In addition, the law "On Investments" restricts recourse to 
international arbitration and places more reliance on the 
Kazakhstani judicial system for dispute resolution. The U.S. Embassy 
advocates on behalf of U.S. firms with investment disputes. 
 
Performance Requirements and Incentives 
--------------------------------------- 
The Investment Committee under the Ministry of Industry and Trade is 
responsible for monitoring the fulfillment of obligations undertaken 
by investors. If the committee determines that a company has not 
complied with its financial or other contractual obligations, the 
government may revoke the operating license of the company. 
With the exception of investments in oil production or mining, rules 
on local content and local sources of financing vary from contract 
to contract.  Typically, an investor's obligations might include an 
obligation to train local specialists and contribute to the social 
development of the respective regions. 
Technology transfers frequently occur and sometimes are written into 
contracts, but are not explicitly required for foreign investment. 
The Investment Law of 2003 provides tax preferences, customs duties 
exemptions, and in-kind grants as incentives for investment in 
government-determined priority sectors. To obtain the preferences, 
the investor enters into a contract with the Investment Committee. 
Under the law, the government may rescind such incentives, and 
collect back payments on duties, etc. including fines, if the 
investor fails to fulfill contractual obligations. The early 2006 
amendments to the Investment Law eased compliance and audit 
requirements for firms wishing to qualify for the preferences. The 
law provides the same preferences for domestic and foreign 
investors.  Preferences are, however, determined on a case-by-case 
basis.  The Ministry of Industry and Trade reported that in 2007 it 
signed 76 contracts for a total of about $1.65 billion, in which 
such preferences were extended.  Roughly a quarter of these 
investments had foreign involvement. 
The preferences system echoes the government's policy of 
diversifying the economy away from the extractive sector and largely 
focuses on selected clusters. The overall list contains 245 types of 
activities grouped into 36 categories. The system applies to new 
enterprises as well as to existing enterprises making new 
investments; the duration of the tax preferences increases with the 
size of such investments. 
In 2006-2007, the government created fourlarge state-owned holding 
companies; Samruk, Kazyna,, KazAgro, and Samgau.  The Samruk State 
Holding Company, modeled on Singapore's Temasek, manages the state's 
shares in a growing number of large enterprises. The Kazyna 
Sustainable Development Fund oversees the government's development 
institutions aiming to stimulate the country's non-extractive sector 
and diversify the economy.  KazAgro manages the state's agricultural 
holdings.  Samgau, the newest holding, is charged with stimulating 
the development of domestic know-how in the high-tech sector. 
In 2007, the government also announced formation of Social 
Entrepreneurial Corporations (SECs).  Charged with managing regional 
government's holdings, SECs are meant to serve as a link between 
business and regional governments. There are no known cases in which 
U.S. or other foreign firms have been denied participation in 
government-financed or subsidized research and development programs 
on a national basis. The Kazakhstani government has recently taken a 
strong interest in dedicating state resources to the support of 
research and development. How such projects will be administered in 
practice remains to be seen. 
The government has liberalized its trade policies and has passed 
legislation to begin bringing its legal and trade regimes into 
conformity with World Trade Organization (WTO) standards. Kazakhstan 
submitted its Memorandum on the Foreign Trade Regime (MFTR) in 1996 
and the first round of consultations on WTO accession took place in 
1997. Kazakhstan has made significant progress in implementing a 
legal framework necessary for accession and signed bilateral 
protocols on market access for goods and services with several of 
its major trading partners.   The Kazakhstani government is hoping 
to complete WTO accession negotiations by the end of 2008. 
Kazakhstan is also a member of the Eurasian Economic Community 
(EEC), along with Russia, Kyrgyzstan, Belarus, Tajikistan, and 
Uzbekistan. Armenia, Moldova and Ukraine currently have observer 
status. In 2006, Kazakhstan, Russia, and Belarus announced the 
formation of a trilateral customs union. There are plans to 
eventually expand it to include other EEC countries. The union aims 
to bring about coordinated customs procedures and a high degree of 
uniformity in its members' external tariffs. The government's 
working assumption appears to be that the country will enter the WTO 
before the customs union will enter into force. 
 
ASTANA 00000146  007 OF 016 
 
 
Kazakhstan permits the importation of goods from EEC partners and 
certain developing or less-developed countries either free of duty, 
or at a reduced rate. There are no special requirements for engaging 
in trade-related activities. In keeping with internationally 
accepted practices, registration as an entrepreneur, legal entity, 
or branch/representation office is required. 
 
Right to Private Ownership and Establishment 
-------------------------------------------- 
Foreign and domestic private entities have the right to establish 
and own business enterprises and to engage in all forms of 
remunerative activity. Private entities can freely buy and sell 
interests in business enterprises. However, state-owned enterprises 
do sometimes enjoy better access to markets, credits, and licenses 
than private entities. 
Kazakhstan's constitution provides that land and other natural 
resources may be owned or leased by persons who are Kazakhstani 
citizens according to conditions established by law. The 2003 Land 
Code allows citizens of Kazakhstan to own agricultural land and 
urban land with commercial and non-commercial buildings and 
complexes, including dwellings and land used for servicing these 
buildings. Under the 2003 Land Code, only Kazakhstani citizens 
(natural and legalized) and Kazakhstani companies may own land. The 
Land Law does not allow private ownership for the following types of 
land: 
-- land used for national defense and national security purposes; 
-- specially protected natural territories, resorts, recreational 
land and territories of a historical and/or cultural significance; 
-- forests, water reservoirs (lakes, rivers, canals, etc.), 
glaciers, swamps, etc.; 
-- p
ublic areas (urban or rural settlements); 
-- main railways and public roads; 
Short-term land leases may last for up to five years. The maximum 
period for long-term land leases are 49 years. Foreigners may rent 
agricultural land for up to 10 years. Foreigners may also own 
agricultural land through either a Kazakhstani-registered joint 
venture or a full subsidiary. 
 
Protection of Property Rights 
----------------------------- 
Secured interests in property (fixed and non-fixed) are recognized 
under the Civil Code and the 2003 Land Code. Mortgage lending has 
grown dramatically in the past several years.  A credit bureau 
system does exist, but is in very early stages of development. The 
National Bank has created a national mortgage agency, which issues 
bonds secured by mortgages purchased from banks. All property and 
lease rights for real estate must be registered with special 
government-owned Real Estate Centers, which exist in cities and 
rural district centers. 
In principle, Kazakhstan's Civil Code protects U.S. intellectual 
property. In addition, the U.S.-Kazakhstan Trade Agreement, which 
came into force in 1993, obliges Kazakhstan to protect intellectual 
property rights (IPR).  In 2004, Kazakhstan ratified the 1997 World 
Intellectual Property Organization (WIPO) Copyright Treaty and the 
WIPO Performances and Phonographs Treaty, and amended the Copyright 
Law to affirmatively protect pre-existing works and sound 
recordings. In 2005, Kazakhstan amended its Criminal and Civil Codes 
to make IPR crimes easier to prosecute and to toughen penalties for 
violators.  The 2005 amendments played a significant role in USTR's 
2006 decision to remove Kazakhstan from the Special 301 Watch list. 
While Kazakhstan has demonstrated a commitment to improving its IPR 
regime, substantial weaknesses, particularly in the area of civil 
dispute resolution, still remain. 
Patents and trademarks: Patent protection is available for 
inventions, industrial designs and prototypes. Patents for 
inventions are available with respect to processes and products that 
are novel and have industrial applications. However, patent 
protection for certain types of products and processes -- such as 
layout designs and plant variety - is not yet available. The 
National Institute of Intellectual Property performs formal 
examination of patent applications. 
Patents for inventions are granted for a period of 20 years; patents 
for industrial designs are granted on a preliminary basis for five 
years. This period may be extended for an additional 10 years if the 
preliminary patent is converted to a patent. Prototypes are granted 
a five-year initial period of protection, with the possibility of an 
additional three-year extension. Unsuccessful applicants have the 
right to appeal decisions of the National Institute of Intellectual 
Property and the Committee for Intellectual Property Rights. 
Kazakhstan is a member of the Moscow-based Eurasian Patent Bureau 
and the Munich-based European Patent Bureau. 
Trademark violation is a crime. Enforcement has historically been 
questionable, but U.S. companies are generally confident that their 
trademarks are protected in Kazakhstan. Still, imported counterfeit 
goods can commonly be found at local markets. There are marked 
disparities in fees charged to domestic patent and trademark 
applicants, as compared to foreign applicants. Applications for 
trademark, service mark and appellations of origin protection should 
 
ASTANA 00000146  008 OF 016 
 
 
be filed with the National Patent Office and approved by the 
Committee for Intellectual Property Rights. Trademarks and service 
marks are afforded protection for a period of 10 years from the date 
of filing. 
Copyrights: The Law on Copyrights and Related Rights was enacted in 
1996. The law is largely in conformity with the requirements of the 
WTO TRIPS Agreement and the Berne Convention. 
In late 2006, the government stated its plans to provide customs 
officials with ex officio authority to seize counterfeit products at 
the border.  However, appropriate legislation has not been passed. 
Complicating the issue is the government's concern that granting ex 
officio powers may exacerbate corruption at customs checkpoints. 
Amendments to the Administrative, Criminal and Civil Procedural 
Codes have been adopted to bolster IPR enforcement capabilities. IPR 
enforcement measures, while still somewhat sporadic, are 
increasingly robust. Prosecutions, under both the Criminal and 
Administrative Codes, have led to a steady legitimization of the 
domestic trade in copyrighted material. Progress in IPR protection 
through civil courts is less pronounced as the judicial system 
develops the expertise necessary to resolve the more complex civil 
disputes. 
Illegal software development and manufacture generally is not 
conducted in Kazakhstan; Russia and Ukraine are believed to be the 
major sources of bootleg software to the local market. 
Kazakhstan ratified the Berne Convention for the Protection of 
Literary and Artistic Works in 1998 and the Geneva Phonograms 
Convention in 2000. 
 
Transparency of Regulatory System 
--------------------------------- 
Transparency in the application of laws remains a major problem in 
Kazakhstan and an obstacle to expanded trade and investment. Foreign 
investors complain of changing standards and of corruption. While 
foreign participation is generally welcomed, some foreign investors 
point out that the government is not always even-handed and 
sometimes reneges on its commitments. Although the Investment 
Committee of the Ministry of Industry and Trade was established to 
facilitate foreign investment, it has had limited success in 
addressing the concerns of foreign investors. 
Opportunities for public comment on proposed laws and regulations 
are sporadic and generally limited. Often, contradictory norms 
hinder the functioning of the legal system. While Kazakhstan has 
recently defined more clearly which laws take precedence in the 
event of a contradiction, it has become clear that stability clauses 
granted investors under previous versions of the Foreign Investment 
Law or other legislation may not necessarily protect investors from 
changes in the legal and tax regulatory regime. The 2003 Investment 
Law holds that contracts signed subsequent to its enactment may be 
subject to amendments in domestic legislation and international 
treaty provisions that change "the procedure and conditions of the 
import, manufacture, and sale of goods subject to excise duties As 
an additional complication, oblast authorities may create additional 
bureaucratic encumbrances, especially in the licensing and issuance 
of permits.. 
Kazakhstan, by law, will provide compensation for violations of 
contracts that were properly entered into and guaranteed by the 
government. Where the government has merely "approved" or 
"confirmed" a foreign contract, Kazakhstan's responsibility is 
limited to performing administrative acts necessary to facilitate 
the subject investment activity (acts "concerning the issuance of a 
license, granting of a land plot, mining allotment, etc."). 
Kazakhstan's institutional governance is weak , further adding to 
the prob
lems of transparency in commercial transactions. Senior 
government officials have a large say in minor and major 
transactions, and decisions are often made behind closed doors. 
A 1995 Licensing Law established the legal framework for licensing 
activities in Kazakhstan. It requires the relevant agency to issue a 
license within one month of a company's submitting all required 
documents.  The law was further amended in 1998, 2005, and January 
2007.  The 2007 amendments simplified procedural requirements for 
issuing licenses, reduced the number of licensed activities from 426 
to 100 and introduced a mechanism to help prevent the extension of 
this list by other legal acts.  However, licensing remains a 
problematic area for business, particularly for small- and medium- 
sized enterprises. 
 
Efficient Capital Markets and Portfolio Investment 
--------------------------------------------- ----- 
Kazakhstan's efforts to create a sound financial system and a stable 
macroeconomic framework have been notable among former Soviet 
republics. Much progress has been made in creating and implementing 
an adequate legal framework. In comparison with other parts of the 
economy, reform of the financial system has been deeper and more 
effective. The financial system has started to mediate financial 
resource flows and direct them to the most promising parts of the 
economy. Official policy is clearly supportive of credit allocation 
on market terms and the further development of legal, regulatory and 
accounting systems that are consistent with international norms. 
 
ASTANA 00000146  009 OF 016 
 
 
The National Bank has demonstrated a willingness to pursue monetary 
tightening in response to inflationary pressures. In 2006, it raised 
the refinancing rate twice as well as toughened reserve requirements 
for second-tier banks. Capital inflows and commodity exports have 
enabled the National Bank to accumulate foreign exchange reserves, 
and at the same time to lower interest rates and maintain inflation 
in the single-digit range. 
As of the middle of December 2007, the net gold and hard currency 
reserves of the National Bank stood at $18.1 billion; the total gold 
and hard currency reserves of Kazakhstan, including the National 
Bank reserves and reserves accumulated in the National Fund, reached 
$39 billion. The National Bank has pursued market-based policies 
that have contributed to financial sector development and to 
exchange rate stability. In 1999 the National Bank created a deposit 
insurance system in order to attract the nearly $1 billion in cash 
it estimated people were hoarding at home. Since then, private 
deposits have grown thirty nine-fold, from less than $300 million in 
November 1999, to $11.87 billion in November 2007. 
Most domestic borrowers receive credit from Kazakhstani banks. 
However, foreign investors find the margins taken by local banks and 
the collateral required for credit to be very onerous. It is usually 
cheaper and simpler for them to use retained earnings or borrow from 
their home country. The Kazakhstani Stock Exchange is struggling to 
gain momentum and, as such, not yet a realistic source of funds (see 
below). Since 1998, Kazakhstani banks have placed Eurobonds on 
international markets and obtained syndicated loans, the proceeds of 
which have been used to support domestic lending. Leading 
Kazakhstani banks have been able to obtain reasonably good ratings 
from international credit assessment agencies. The National Bank and 
 the Financial Supervision Agency (FSA) supervise the banking system 
and have overseen a steady consolidation and strengthening of it. 
The global liquidity crunch, which hit in late summer 2007, 
presented a substantial challenge to the Kazakhstani banking system, 
which had come to rely heavily on external borrowing over the 
preceding five-year period.  Kazakhstani banks had been directing 
much of the borrowed funds into the country's construction and real 
estate sectors, particularly in the form both of construction 
financing and for mortgages for new housing in Astana and Almaty. 
The sudden global liquidity dry-up abruptly left some leading 
Kazakhstani banks unable to continue their aggressive external 
borrowing, forcing them to curtail their domestic lending activity. 
While policymakers widely saw this development as a healthy 
correction in view of the preceding liquidity glut, the National 
Bank of Kazakhstan and the government introduced measures in late 
2007 to provide liquidity to the banking system and inject capital 
in the cooling construction sector. 
Since 1999, a market for debt securities has been rapidly developing 
in Kazakhstan. Several dozen bank and non-bank corporations - large 
and small - have issued bills, notes and bonds with maturities 
ranging from three months to seven years. Earlier issues have 
matured and been redeemed; so far, there have been no defaults. 
Rates for borrowers have declined on average from approximately 16% 
in September 1999 to approximately 9% in 2006. Maturities have 
increased from 1.5 years to up to 10 years during the same period. 
Kazakhstan's pension system reform has boosted the bond market by 
creating a pool of capital. The market for fixed-income securities 
has grown from $74,000 in September 1999 to over $14.7 billion in 
October 2007. 
In 2007, the yield rate on middle-term government notes was 6.35%. 
Longer-term government notes (with maturities up to 10 years) were 
offered at 7.0%. 
The Kazakhstani Stock Exchange (KSE) has been in operation since 
1997. As of December 2007, there were 69 listed companies with 31 
"A-listed" stock issues; 38 companies with "B-listed" stock issues; 
and 5 non-listed issuers. There are also 62 "A-listed" and 26 
"B-listed" corporate bond issues. Inadequate financial records 
prevent many other companies from being put on the exchange. 
Moreover, company managers fear diluting control of their 
enterprises by selling more shares. 
As of October 1, 2007, total capitalization of the KSE was $71.95 
billion, or 70.7% of GDP Though there has been a slight decline of 
capitalization over the second half of 2007, a continued annual 
growth in both the absolute value of total capitalization and 
capitalization relative to GDP has occurred for the last three 
years. 
Trading on the KSE is overwhelmingly dominated by block trades, 
liquidity is low, and the spreads are extremely wide. In 2006, 
several large Kazakhstani companies issued initial public offerings 
on the London Stock Exchange (LSE). In compliance with a 2006 law 
requiring any foreign IPO by a Kazakhstani company to be accompanied 
by a domestic issuance, these companies also offered shares on the 
KSE. However, despite these offerings and the Kazakhstani pension 
funds' (see below) tentative moves to invest in KSE-traded shares, 
the exchange remains in a very early stage of development. Due 
largely to Kazakhstani companies' recalcitrance to dilute ownership 
and provide extensive disclosure, the Kazakhstani debt market is 
substantially more developed. The plans for the "Almaty Financial 
Center" (see below) aim to spearhead the development of Kazakhstan's 
 
ASTANA 00000146  010 OF 016 
 
 &#x
000A;financial markets.  In 2007, the Almaty Financial Center officially 
announced that it would merge its efforts to create an effective 
equity market with the KSE, thereby signaling that there will be 
only one stock exchange in Kazakhstan in the foreseeable future.) 
The Financial Supervision Agency (FSA), Kazakhstan's main financial 
regulator, has broad authority over the banking and insurance 
sectors, as well as the stock market.  The FSA is financed from the 
National Bank's budget and subordinated to the President of 
Kazakhstan. 
In 1998, the government introduced an accumulation pension system 
that requires all employed persons to contribute 10% of their salary 
to accumulation pension funds. As of November 2006, the 14 funds (13 
private and one state-owned) operating in Kazakhstan held 
approximately $9.6 billion in assets. Asset management companies 
invest the contributions on behalf of the pension funds. While the 
government provides specific restrictions on how the pension funds 
may invest, these restrictions were relaxed in 2006, allowing some 
involvement in Kazakhstani equities. Still, the pension assets must 
be invested primarily in specific categories of instruments, such as 
government bonds and A-listed securities. The largest concentration 
of investments is in dollar-denominated Kazakhstani Eurobonds. 
Custodian banks hold pension assets. The government plans to sell 
some shares of state enterprises on the national stock market, 
partly to provide a more profitable alternative vehicle for the 
investment of pension fund assets. 
There appear to be no "cross-shareholding" or "stable shareholder" 
arrangements used to restrict foreign investment in private firms 
through mergers and acquisitions. Joint stock companies may not 
cross-hold more than 25% of each other's stock unless they have an 
exemption codified by law and may not exercise more than 25% of the 
votes in a cross-held joint stock company. Kazakhstani law 
recognizes companies as "related" if one company or legal entity 
holds more than 20% of the shares of another. However, the owning 
company may not vote more than 25% of the total shares at the 
general meeting of shareholders of the related company. The general 
meeting must approve various corporate actions, such as mergers and 
acquisitions. This rule applies to all persons, domestic or foreign. 
 
There have been very few hostile takeovers in Kazakhstan, primarily 
because there are few publicly traded firms. Defensive measures are 
not targeted toward foreign investors in particular. Current 
legislation provides a legal framework for takeovers. The Civil Code 
requires a company that has purchased a 20% share in another company 
to publish information about the purchase. 
The mutual investment fund industry remains small but is growing 
rapidly.  As of October, 1 2007, total assets of the mutual 
investment funds amounted to $1.16 billion, representing a 302% 
increase when compared to October 2006 figures. Despite a reduction 
from 37.1% in October 2006 to 15.77% in October 2007, Kazakhstani 
corporate securities remain a significant share of the consolidated 
mutual fund investment portfolio. 
The 1998 Law on Joint Stock Companies provides the basis for the 
regulation of open and closed-type joint stock companies. It also 
contains clauses to protect investors in often-abused circumstances, 
such as: 
-- issuance of additional shares; 
-- maintenance of charter capital and restrictions on payments of 
dividends; 
-- re-purchase by a company of its own shares; 
-- debt-to-equity conversions; 
-- fiduciary duties imposed on company officers; 
-- proxy votes; 
-- independent audit; and 
-- the determination of asset values during the sale of company 
property. 
The Law on Joint Stock Companies also regulates tender offers for 
stock of open joint stock companies by requiring the purchaser to 
notify the Financial Supervision Agency and the target company of 
their intention to purchase 30% or more of the target company and, 
after such purchase, to make an offer to all remaining shareholders 
to purchase their shares at the average price during the last six 
months before the purchase. 
There are no laws or regulations specifically authorizing firms to 
adopt articles of incorporation or associations that limit or 
prohibit foreign investments. The Law on Joint Stock Companies, 
however, allows charter limits on the number of shares or votes that 
one shareholder may have. 
In March 2007, the Government accepted amendments to legislation 
regarding the protection of minority stockholders' interests.  The 
enactment of this law was prompted by numerous violations of 
minority stockholders' interests. In addition, this step was driven 
by the Government's intention to promote the development of stock 
exchange. 
Standards, including sanitary and phyto-sanitary standards, are 
promulgated solely by the Committee for Technical Regulation and 
Metrology (Gosstandard). Proposals for adoption, amendment, or 
abolishment of state standards are normally prepared by technical 
committees constituted by Gosstandard, and may include producers, 
 
ASTANA 00000146  011 OF 016 
 
 
scientific and engineering associations, and technical experts. 
Foreign participation in the standardization process is regulated by 
international multilateral and bilateral agreements. 
 
Political Violence 
------------------ 
There have been no incidents of politically-motivated violence 
against foreign investment projects. Kazakhstan has been stable 
since independence. Politically-motivated civil disturbances remain 
exceptionally rare. Kazakhstan has good relations with its 
neighbors. The government continues to express concern over the 
security of its borders with Kyrgyzstan and Uzbekistan, which it 
views as vulnerable to penetration by extremist groups. 
Kazakhstan's 2007 parliamentary elections took place without 
significant violence or unrest. President Nazarbayev's Nur Otan 
party won every seat in the lower house of parliament with an 
overwhelming majority of the votes. In its assessment, the OSCE 
noted that the election did not meet a number of OSCE commitments 
and international standards for democratic elections. Although 
opposition groups denounced the election as fraudulent, there were 
no significant demonstrations against the announced results. The 
next parliamentary election is scheduled to take place in 2012. 
The February 2006 murders of a prominent opposition politician and 
his two associates were perceived by opposition parties as 
politically motivated. The former chief of staff of the Senate was 
convicted in August 2006 of having ordered the murders; prosecutors 
charged that he was motivated by personal animosity. 
 
Corruption 
---------- 
Although the Kazakhstani Criminal Code contains special penalties 
for accepting and giving bribes, corruption is prevalent throughout 
Kazakhstan. The Ministry of Interior, the Financial Police, the 
Disciplinary State Service Commission, and the Committee for 
National Security (KNB) are responsible for combating corruption. 
The government has taken some measures to address corruption and 
increased its attention to the problem through educational and 
pub
lic awareness efforts.  President Nazarbayev publicly deplored 
corruption and encouraged media to report about it.  Some lower and 
middle-ranking officials and minor political figures have been 
penalized on corruption charges. 
Transparency International has a national chapter in Kazakhstan. The 
government has signed on to the Extractive Industries Transparency 
Initiative (EITI). 
U.S. firms have cited corruption as a significant obstacle to 
investment. Law enforcement agencies have on occasion t pressured 
foreign investors perceived to be uncooperative with the government. 
The government and local business entities are widely aware of the 
legal restrictions placed on U.S. business abroad (i.e., the Foreign 
Corrupt Practices Act). 
In 2003 in the United States two American citizens were charged with 
violating the Foreign Corrupt Practices Act in a case that received 
significant international media attention. The two allegedly 
channeled tens of millions of dollars in bribes to two senior 
Kazakhstani officials during the 1990's in order to facilitate oil 
deals for American companies. One is currently serving a jail term. 
The second defendant, James Giffen, was indicted in 2003 and is 
awaiting trial in the United States. 
 
Bilateral Investment Agreements 
------------------------------- 
The United States-Kazakhstan Bilateral Investment Treaty came into 
force in 1994. In 1992, the United States and Kazakhstan signed an 
Investment Incentive Agreement. 
In 1996, the Treaty on the Avoidance of Double Taxation between the 
United States and Kazakhstan came into force. However, an ongoing 
dispute with a U.S. investor raises concerns with the government's 
tax treaty compliance. Since independence, Kazakhstan has ratified 
treaties on the avoidance of double taxation with 41 countries. 
Kazakhstan has bilateral investment agreements in force with forty 
countries, including the United States, Great Britain, Germany, 
France, Austria, Russia, Korea, Iran, China, and Turkey. 
 
OPIC and Other Investment Insurance Programs 
-------------------------------------------- 
The Overseas Private Investment Corporation (OPIC), an independent 
U.S. Government agency that provides project financing, political 
risk insurance, and a variety of investor services, has been active 
in Kazakhstan since 1994. OPIC is seeking commercially viable 
projects in the Kazakhstani private sector. OPIC offers a full range 
of investment insurance and debt/equity stakes. 
Kazakhstan is a member of the Multilateral Investment Guarantee 
Agency (MIGA). 
 
Labor 
----- 
The 1999 Labor Law and the Constitution guarantee basic workers' 
rights, including the right to organize and the right to strike. 
 
ASTANA 00000146  012 OF 016 
 
 
Teachers, miners and workers at a variety of enterprises have 
conducted occasional strikes for generally short periods during the 
past several years. In September 2006 the death of 41 miners in an 
explosion at Mittal Steel Termirtau's "Lenin" coal mine triggered an 
unprecedented wave of strikes. Mittal's striking coal miners were 
joined by steel workers which shut down operations at each of the 
eight coal mines owned by the company for a week. The strike ended 
after Mittal agreed to substantial raises. Subsequently, two U.S. 
companies operating coal mines in Kazakhstan raised wages 25-30% in 
order to avert threatened strikes. 
The 1996 Law on Labor Disputes and Strikes lays out the procedure 
for resolving disputes. However, the law also restricts strikes by 
requiring, inter alia, that a peaceful attempt at a solution first 
be made, that two-thirds of the labor collective must approve the 
strike, and that the employer must be warned 15 days in advance in 
writing. In addition, strikes for political purposes are forbidden. 
 
A separate 1992 Law on Collective Bargaining Agreements sets out the 
basic framework for concluding such agreements. There are instances 
of unions successfully negotiating collective bargaining agreements 
with management. 
In May 2007, Kazakhstan passed a new Labor Code, encompassing all 
the preceding legislation under a single umbrella.  Key provisions 
of all the previous labor laws were retained.  The Labor Code 
extended minimum mandatory vacation time from 18 to 24 days, 
provided an outline of labor unions' and labor representatives' 
rights, and toughened rules governing the dissolution of labor 
contracts. 
The 1993 Law on Professional Labor Unions provides a legal guarantee 
against limitations of labor. It also grants socio-economic, 
political and personal rights and freedoms as a result of membership 
in a union and prohibits the denial of employment, the denial of 
promotion or termination of employment on the basis of such 
membership. Kazakhstan also joined the International Labor 
Organization (ILO) in 1993. As of January 2007, Kazakhstan has 
ratified 16 ILO conventions, including those pertaining to minimum 
employment age, forced labor, discrimination in employment, equal 
remuneration, and collective bargaining. 
Kazakhstan's economy has grown steadily in the last five years. 
Preliminary 2007 GDP growth is estimated at 8.7%.  (The highest 
year-on-year rate was 13.5% in 2001.) Although incomes and consumer 
spending have risen across the board, in the 3rd quarter 2007 the 
minimum subsistence wage is still only $83.. per month;   with 13.8% 
of the population receiving income below that level. Starting on 
January 1, 2008, the minimum pension  will be $65.45 per month. By 
government estimates, in the 3rd quarter of 2007 unemployment was 
7%. 
Kazakhstan has an educated and technically competent workforce. 
However, the demand for specialized skilled labor created by the 
simultaneous development of several major oil fields in western 
Kazakhstan has exceeded locally available supply. Foreign investors 
increasingly cite a lack of skilled workers and technical 
professionals. Management expertise and marketing skills are also in 
short supply. Many large investors rely on foreign workers, 
particularly from Turkey, to fill the vacuum. In turn, the GOK has 
made it a priority to ensure that Kazakhstani citizens are 
well-represented on foreign enterprise workforces, and is 
particularly keen to see Kazakhstanis hired into the managerial and 
executive ranks of those enterprises. In late 2006, the government 
discussed measures limiting the inflow of foreign workers, 
particularly unskilled, and pressuring large foreign investors to 
hire and train Kazakhstanis. Since 2001, the quota system has 
required employers to search for local workers prior to the issuance 
of work permits for foreigners (see section A.1.). U.S. companies 
are strongly advised to contact locally-based law and accounting 
firms, as well as the U.S. Commercial Service in Almaty, for the 
latest information on work permits. 
Employers' reliance on foreign labor in the face of persistent 
poverty in rural Kazakhstan became a political issue in 2006 and 
2007. The debate revolved around the underlying causes of some 
violent incidents between Kazakhstani and foreign workers. The 
tension was epitomized by a major October 2006 brawl that involved 
over 400 workers. Policymakers often point
 to disparities in wages 
and working conditions between Kazakhstani and foreign workers. 
Employers retort that the domestic lack of skilled labor frequently 
necessitates management of Kazakhstani laborers by foreigners. 
 
Foreign - Trade Zones/Free Ports 
-------------------------------- 
A system of tax preferences exists for enterprises engaging in 
prescribed economic activities in the so-called "special economic 
zones." As of December 2007, four such zones had been established: 
the "New Administrative Center" in Astana, the Seaport of Aktau, the 
Alatau Information Technology Park (near Almaty), and the Ontustik 
Cotton Center in south Kazakhstan.). In addition, a separate 
preferential tax system exists for enterprises manufacturing high 
value-added goods, regardless of location. 
In the second half of 2006, the government took steps toward 
 
ASTANA 00000146  013 OF 016 
 
 
establishing the Almaty Financial Center, a legal and institutional 
framework aimed at making Almaty the financial capital of Central 
Asia. The plans, which are still in very early stages of 
implementation, include tax privileges for major participants in the 
financial marketplace: investors, broker-dealers, and issuing 
corporations. The legal framework for the Almaty Financial Center 
includes a specialized court with jurisdiction over civil disputes 
between the Financial Center's participants 
 
Foreign Direct Investment (FDI) Statistics 
------------------------------------------ 
Annual Gross Foreign Direct Investment Flows by Country of Origin 
(Millions of Dollars; nominal) 
1993-20052006  2007(1st half) Total 
USA 11,841.2  1,694.7  802.2 14,338.1 
UK 4,378.7  852.5  255.2  5,486.4 
South Korea 1,880.9  248.6  116.6  2,246.1 
Italy 2,468.3 376.1  212.6  3,057 
Canada 1,481.2  437.1  273  2,191.3 
Switzerland 2,021.5  234.6  367.9  2,624 
Netherlands 4,940.1  2,877.3  1,170.6  8,988 
China 1,680.5  359.5  171.6  2,211.6 
Turkey 906.9   92.9  141.9  1,141.7 
Russia 1211.1  490.9  219.0  1,921 
Japan 1005.1  342.6  169.7  1,517.4 
Others 6,970  2,559.9  3,033.6  12,563.5 
TOTAL 40785.5  10,566.7  6,933.9   58,286.1 
Source: National Bank of Kazakhstan 
 
Annual Gross Foreign Direct Investment Flows by Sector (Millions of 
dollars; nominal) 
1993-2005  2006  2007 (1st half)  Total 
 
AGRICULTURE, 15.7  37.3  1.3  54.3 
HUNTING AND 
FORESTRY 
 
MINING AND  22,286.2  2,323.1  2,126.4   26,735.7 
QUARRYING 
 
mining of coal 39.8  0.0  0.0  39.8 
and lignite, 
extraction 
of peat 
 
extraction of  20,406.3  2,003.4  1886.3  24,296 
crude 
petroleum 
and natural 
gas 
 
mining of 146.5  162.4  83.7  392.6 
uranium and 
thorium ores 
 
mining of 884.6  149.1  156.2  1,189.9 
metal ores 
 
other mining 
and quarrying 50.9  8.3  0.1  55.5  114.8 
 
MANUFACTURING  5,066.4  644.4  326.1  6,036.9 
 
including but 
not limited 
manufacture of 
food products, 644.7  51.9  19.8  716.4 
beverage and 
tobacco products 
 
manufacture of 
coke, refined 
petroleum 
products 508.2 -15.8 -192.8 299.6 
and nuclear 
fuel 
 
manufacture of 139.8  17.9  7.9  165.6 
chemicals 
and chemical 
products 
 
manufacture of 32.9   7.9  12.3  53.1 
rubber and 
plastics 
products 
 
manufacture of 85.9  26.2  13  125.1 
 
ASTANA 00000146  014 OF 016 
 
 
other 
non-metallic 
mineral products 
 
manufacture 3,068.7   423.9  385.8  3,878.4 
of basic metals: 
manufactures 405.7  1.4  1.6  408.7 
of ferrous 
metals 
 
manufacture of 2,649.3  419  381  3,449.3 
basic precious 
and non-ferrous 
metals 
 
manufacture of 13.9  3.4  3.3  20.6 
fabricated 
metal products 
except 
machinery 
and equipment 
 
manufacture 21.4  4.2  0.1  25.7 
of machinery 
and equipment 
 
manufacture 431.1  39.7  20.4  491.2 
of electric 
and computing 
machinery 
 
manufacture of 11.8  72.4  53.9  138.1 
transport 
equipment 
 
manufacture, 5.0  0.7  1.6  7.3 
n.e.c 
 
ELECTRICITY, 699.2  26.6  5.3  731.1 
GAS AND WATER 
SUPPLY 
 
CONSTRUCTION 416.1  378.4  243.8  1,038.3 
 
WHOLESALE AND 1,122.8 760.9  618.7  2,502.4 
RETAIL TRADE, 
REPAIR OF 
MOTOR VEHICLES, 
MOTORCYCLES 
AND PERSONAL AND 
HOUSEHOLD GOODS 
 
HOTELS AND 115.3  10.2  43.5  169 
RESTAURANTS 
 
TRANSPORT690.6  301.3  48.5  1,040.4 
STORAGE AND 
COMMUNICATION 
land transport 378.8  23.6  20.6  423 
 
including 
transport 
via pipelines 360.3  19.4  20.6  400.3 
 
water -12.2  4.1  0.6  -7.5 
transport 
 
air transport 24.9  3.2  1.1  29.2 
 
supporting 152.3  187.4  29.5  369.2 
transport 
activities 
 
post and 146.8  83  -3.2  226.6 
telecommunication 
 
including 145  81.1  -4.0  222.1 
telecommunication 
 
FINANCIAL 494.2  375  201.6  1070.8 
ACTIVITY 
 
REAL ESTATE, 9,223.3   5,610.1  3,271  18104.4 
RENTING 
AND BUSINESS 
ACTIVITIES 
 
Including 
 
ASTANA 00000146  015 OF 016 
 
 
but not limited 
real estate 
activities 105.1 29.1 30.6 164.8 
 
legal, 
accounting, book- 
keeping and 
auditing                   143.2 -22.5 49.6  170.3 
activities, 
tax consultancy, 
market research, 
business and 
management 
consultancy 
geological  8,739.5 5,487.5 3,167.6 17,394.6 
exploration and 
prospecting 
activities 
 
EDUCATION, 295.3  99.5  47.5  442.3 
HEALTH AND 
SOCIAL WORK 
 
ACTIVITIES, 360.8  0.0  0.0  360.8 
N.E.C. 
 
TOTAL      40, 785.5  10,566.7 6,933.9   58 286.1 
Source: National Bank of Kazakhstan 
 
FDI as a Percentage of GDP 
2005   2006  2007(1st half) 
11.58% 13.05% 15.5% 
Source: National Bank of Kazakhstan 
 
Kazakhstani Direct Investment Outflows 
Millions of US dollars, nominal 
Country of 
Destination 2004-2005 2006 2007(1st half) Total 
Austria   0.4     0.3       0.1    0.8 
Azerbaijan 0.0    3.2       3.4     6.6 
Armenia 2.8     0.7       0.0   3.5 
Afghanistan 0.1  -0.1  0.0   0.0 
Byelorussia 3.4  1.5  0.1   5.1 
Bulgaria   0.0  0.0  0.7   0.7 
Dominican Republic 0.0 10.0 0.0   10.0 
France   0.0  0.0  3.0  3.0 
Great Britain 15.5  -3.7  82.1   93.9 
Virgin Islands 43.225.4  78.9   147.5 
Germany 217.3  0.2  10.4  227.9 
Georgia 1.9  66.0  9.2   77.1 
Hong Kong 0.0  0.0  60.0   60.0 
Israel  0.0  0.4  0.0   0.4 
India  0.0 0.1  0.1   0.2 
Iran  0.0  0.0  0.3   0.3 
Italy  0.1  0.0  0.0   0.1 
Canada  5.8  37.3  0.0   43.1 
Cayman Islands 0.0 0.5  0.0  0.5 
Cyprus 0.0  0.8  88.8   89.6 
China  6.0  7.1  34.5   47.6 
Kyrgyzstan 57.4  102.8  55.4   215.6 
Latvia  1.9  0.0  0.3   2.2 
Lithuania 0.0
 -5.0  0.0   -5.0 
Luxemburg 0.0  9.5  1.7   11.2 
Malaysia  0.0  0.8  0.7  1.5 
Marshall Islands 0.0 0.0  96.0  96.0 
Isle of Man   6.6  0.0  0.0  6.6 
Mongolia 0.1  0.0  0.0   0.1 
Netherlands 17.5  639.4 17.6  674.5 
Nigeria 0.0  0.0  0.1   0.1 
Arab Emirates 0.0 1.4  37.7   39.1 
Russian Federation 127.2  183.3  198.1  508.6 
Seychelles 28.3  0.0  0.0   28.3 
Singapore 0.0  2.4  61.7   64.1 
South Korea 0.0  0.0  1.1     1.1 
Spain 0.0  0.0  1.0      1.0 
USA 8.1   3.2  0.4   11.7 
Tajikistan 0.1  12.3  10.7    23.1 
Thailand 0.0  0.0  0.2      0.2 
Turkey 41.2 3.9  318.3  363.4 
Uzbekistan 8.0  86.0  14.3   108.3 
Ukraine 10.1  2.0  8.7   20.8 
Check Republic -4.00.2  2.0   -1.8 
Switzerland 127.1 77.1  157.5   361.7 
Estonia 0.0  0.0  0.0   0.0 
Other 
Countries 6.5  4.0  0.7   11.2 
TOTAL  732.6  1,273.0  1,356   3,361.6 
Source: National Bank of Kazakhstan 
 
ASTANA 00000146  016 OF 016 
 
 
 
Investments as of 2007 
---------------------- 
The oil and gas sector accounts for approximately 71.5% of the $58.3 
billion that has been invested in Kazakhstan, with U.S. firms 
consistently ranking as the largest foreign investors. U.S. firms 
with noteworthy investment in Kazakhstan's petroleum sector include: 
Chevron, ExxonMobil, and ConocoPhillips. Other major foreign 
investors in this sector include: LucArco, Agip, Shell, Inpex, Eni, 
Total, British Gas, Lukoil, Mitsubishi and the Chinese National 
Petroleum Corporation (CNPC). 
Other major US investments include: AES (over $200 million in power 
generation), Access Industries (coal mining), Philip Morris (over 
$320 million in tobacco processing), and General Electric 
Transportation (locomotive modernization facility). Non-petroleum 
foreign investors include Mittal and BAE Systems. 
 
ORDWAY

Wikileaks

08ASTANA133, 2007 INVESTMENT CLIMATE STATEMENT – KAZAKHSTAN

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08ASTANA133 2008-01-29 02:04 2011-08-30 01:44 UNCLASSIFIED//FOR OFFICIAL USE ONLY Embassy Astana

VZCZCXRO3656
RR RUEHAST
DE RUEHTA #0133/01 0290204
ZNR UUUUU ZZH
R 290204Z JAN 08 ZDK
FM AMEMBASSY ASTANA
TO RUEHC/SECSTATE WASHDC 1554
RUEHAST/USOFFICE ALMATY 0150

UNCLAS SECTION 01 OF 16 ASTANA 000133 
 
SIPDIS 
 
SCA/CEN - O'MARA 
EB/IFD/OIA 
 
SENSITIVE 
 
SIPDIS 
 
E.O. 12958:  N/A 
TAGS: ETRD EFIN ECON EINV PREL OPIC KTDB USTR
SUBJECT: 2007 INVESTMENT CLIMATE STATEMENT - KAZAKHSTAN 
 
REF:   A. 07 State 158802 
 
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ASTANA 00000133  007 OF 016 
 
 
Kazakhstan permits the importation of goods from EEC partners and 
certain developing or less-developed countries either free of duty, 
or at a reduced rate. There are no special requirements for engaging 
in trade-related activities. In keeping with internationally 
accepted practices, registration as an entrepreneur, legal entity, 
or branch/representation office is required. 
 
Right to Private Ownership and Establishment 
-------------------------------------------- 
Foreign and domestic private entities have the right to establish 
and own business enterprises and to engage in all forms of 
remunerative activity. Private entities can freely buy and sell 
interests in business enterprises. However, state-owned enterprises 
do sometimes enjoy better access to markets, credits, and licenses 
than private entities. 
Kazakhstan's constitution provides that land and other natural 
resources may be owned or leased by persons who are Kazakhstani 
citizens according to conditions established by law. The 2003 Land 
Code allows citizens of Kazakhstan to own agricultural land and 
urban land with commercial and non-commercial buildings and 
complexes, including dwellings and land used for servicing these 
buildings. Under the 2003 Land Code, only Kazakhstani citizens 
(natural and legalized) and Kazakhstani companies may own land. The 
Land Law does not allow private ownership for the following types of 
land: 
-- land used for national defense and national security purposes; 
-- specially protected natural territories, resorts, recreational 
land and territories of a historical and/or cultural significance; 
-- forests, water reservoirs (lakes, rivers, canals, etc.), 
glaciers, swamps, etc.; 
-- public areas (urban or rural settlements); 
-- main railways and public roads; 
Short-term land leases may last for up to five years. The maximum 
period for long-term land leases are 49 years. Foreigners may rent 
agricultural land for up to 10 years. Foreigners may also own 
agricultural land through either a Kazakhstani-registered joint 
venture or a full subsidiary. 
 
Protection of Property Rights 
----------------------------- 
Secured interests in property (fixed and non-fixed) are recognized 
under the Civil Code and the 2003 Land Code. Mortgage lending has 
grown dramatically in the past several years.  A credit bureau 
system does exist, but is in very early stages of development. The 
National Bank has created a national mortgage agency, which issues 
bonds secured by mortgages purchased from banks. All property and 
lease rights for real estate must be registered with special 
government-owned Real Estate Centers, which exist in cities and 
rural district centers. 
In principle, Kazakhstan's Civil Code protects U.S. intellectual 
property. In addition, the U.S.-Kazakhstan Trade Agreement, which 
came into force in 1993, obliges Kazakhstan to protect intellectual 
property rights (IPR).  In 2004, Kazakhstan ratified the 1997 World 
Intellectual Property Organization (WIPO) Copyright Treaty and the 
WIPO Performances and Phonographs Treaty, and amended the Copyright 
Law to affirmatively protect pre-existing works and sound 
recordings. In 2005, Kazakhstan amended its Criminal and Civil Codes 
to make IPR crimes easier to prosecute and to toughen penalties for 
violators.  The 2005 amendments played a significant role in USTR's &#x0
00A;2006 decision to remove Kazakhstan from the Special 301 Watch list. 
While Kazakhstan has demonstrated a commitment to improving its IPR 
regime, substantial weaknesses, particularly in the area of civil 
dispute resolution, still remain. 
Patents and trademarks: Patent protection is available for 
inventions, industrial designs and prototypes. Patents for 
inventions are available with respect to processes and products that 
are novel and have industrial applications. However, patent 
protection for certain types of products and processes -- such as 
layout designs and plant variety - is not yet available. The 
National Institute of Intellectual Property performs formal 
examination of patent applications. 
Patents for inventions are granted for a period of 20 years; patents 
for industrial designs are granted on a preliminary basis for five 
years. This period may be extended for an additional 10 years if the 
preliminary patent is converted to a patent. Prototypes are granted 
a five-year initial period of protection, with the possibility of an 
additional three-year extension. Unsuccessful applicants have the 
right to appeal decisions of the National Institute of Intellectual 
Property and the Committee for Intellectual Property Rights. 
Kazakhstan is a member of the Moscow-based Eurasian Patent Bureau 
and the Munich-based European Patent Bureau. 
Trademark violation is a crime. Enforcement has historically been 
questionable, but U.S. companies are generally confident that their 
trademarks are protected in Kazakhstan. Still, imported counterfeit 
goods can commonly be found at local markets. There are marked 
disparities in fees charged to domestic patent and trademark 
applicants, as compared to foreign applicants. Applications for 
trademark, service mark and appellations of origin protection should 
 
ASTANA 00000133  008 OF 016 
 
 
be filed with the National Patent Office and approved by the 
Committee for Intellectual Property Rights. Trademarks and service 
marks are afforded protection for a period of 10 years from the date 
of filing. 
Copyrights: The Law on Copyrights and Related Rights was enacted in 
1996. The law is largely in conformity with the requirements of the 
WTO TRIPS Agreement and the Berne Convention. 
In late 2006, the government stated its plans to provide customs 
officials with ex officio authority to seize counterfeit products at 
the border.  However, appropriate legislation has not been passed. 
Complicating the issue is the government's concern that granting ex 
officio powers may exacerbate corruption at customs checkpoints. 
Amendments to the Administrative, Criminal and Civil Procedural 
Codes have been adopted to bolster IPR enforcement capabilities. IPR 
enforcement measures, while still somewhat sporadic, are 
increasingly robust. Prosecutions, under both the Criminal and 
Administrative Codes, have led to a steady legitimization of the 
domestic trade in copyrighted material. Progress in IPR protection 
through civil courts is less pronounced as the judicial system 
develops the expertise necessary to resolve the more complex civil 
disputes. 
Illegal software development and manufacture generally is not 
conducted in Kazakhstan; Russia and Ukraine are believed to be the 
major sources of bootleg software to the local market. 
Kazakhstan ratified the Berne Convention for the Protection of 
Literary and Artistic Works in 1998 and the Geneva Phonograms 
Convention in 2000. 
 
Transparency of Regulatory System 
--------------------------------- 
Transparency in the application of laws remains a major problem in 
Kazakhstan and an obstacle to expanded trade and investment. Foreign 
investors complain of changing standards and of corruption. While 
foreign participation is generally welcomed, some foreign investors 
point out that the government is not always even-handed and 
sometimes reneges on its commitments. Although the Investment 
Committee of the Ministry of Industry and Trade was established to 
facilitate foreign investment, it has had limited success in 
addressing the concerns of foreign investors. 
Opportunities for public comment on proposed laws and regulations 
are sporadic and generally limited. Often, contradictory norms 
hinder the functioning of the legal system. While Kazakhstan has 
recently defined more clearly which laws take precedence in the 
event of a contradiction, it has become clear that stability clauses 
granted investors under previous versions of the Foreign Investment 
Law or other legislation may not necessarily protect investors from 
changes in the legal and tax regulatory regime. The 2003 Investment 
Law holds that contracts signed subsequent to its enactment may be 
subject to amendments in domestic legislation and international 
treaty provisions that change "the procedure and conditions of the 
import, manufacture, and sale of goods subject to excise duties As 
an additional complication, oblast authorities may create additional 
bureaucratic encumbrances,  especially in the licensing and issuance 
of permits.. 
Kazakhstan, by law, will provide compensation for violations of 
contracts that were properly entered into and guaranteed by the 
government. Where the government has merely "approved" or 
"confirmed" a foreign contract, Kazakhstan's responsibility is 
limited to performing administrative acts necessary to facilitate 
the subject investment activity (acts "concerning the issuance of a 
license, granting of a land plot, mining allotment, etc."). 
Kazakhstan's institutional governance is weak , further adding to 
the problems of transparency in commercial transactions. Senior 
government officials have a large say in minor and major 
transactions, and decisions are often made behind closed doors. 
A 1995 Licensing Law established the legal framework for licensing 
activities in Kazakhstan. It requires the relevant agency to issue a 
license within one month of a company's submitting all required 
documents.  The law was further amended in 1998, 2005, and January 
2007.  The 2007 amendments simplified procedural requirements for 
issuing licenses, reduced the number of licensed activities from 426 
to 100 and introduced a mechanism to help prevent the extension of 
this list by other legal acts.  However, licensing remains a 
problematic area for business, particularly for small- and medium- 
sized enterprises. 
 
Efficient Capital Markets and Portfolio Investment 
--------------------------------------------- ----- 
Kazakhstan's efforts to create a sound financial system and a stable 
macroeconomic framework have been notable among former Soviet 
republics. Much progress has been made in creating and implementing 
an adequate legal framework. In comparison with other parts of the 
economy, reform of the financial system has been deeper and more 
effective. The financial system has started to mediate financial 
resource flows and direct them to the most promising parts of the 
economy. Official policy is clearly supportive of credit allocation 
on market terms and the further development of legal, regulatory and 
accounting systems that are consistent with international norms. 
 
ASTANA 00000133  009 OF 016 
 &#x000A
; 
The National Bank has demonstrated a willingness to pursue monetary 
tightening in response to inflationary pressures. In 2006, it raised 
the refinancing rate twice as well as toughened reserve requirements 
for second-tier banks. Capital inflows and commodity exports have 
enabled the National Bank to accumulate foreign exchange reserves, 
and at the same time to lower interest rates and maintain inflation 
in the single-digit range. 
As of the middle of December 2007, the net gold and hard currency 
reserves of the National Bank stood at $18.1 billion; the total gold 
and hard currency reserves of Kazakhstan, including the National 
Bank reserves and reserves accumulated in the National Fund, reached 
$39 billion. The National Bank has pursued market-based policies 
that have contributed to financial sector development and to 
exchange rate stability. In 1999 the National Bank created a deposit 
insurance system in order to attract the nearly $1 billion in cash 
it estimated people were hoarding at home. Since then, private 
deposits have grown thirty nine-fold, from less than $300 million in 
November 1999, to $11.87 billion in November 2007. 
Most domestic borrowers receive credit from Kazakhstani banks. 
However, foreign investors find the margins taken by local banks and 
the collateral required for credit to be very onerous. It is usually 
cheaper and simpler for them to use retained earnings or borrow from 
their home country. The Kazakhstani Stock Exchange is struggling to 
gain momentum and, as such, not yet a realistic source of funds (see 
below). Since 1998, Kazakhstani banks have placed Eurobonds on 
international markets and obtained syndicated loans, the proceeds of 
which have been used to support domestic lending. Leading 
Kazakhstani banks have been able to obtain reasonably good ratings 
from international credit assessment agencies. The National Bank and 
 the Financial Supervision Agency (FSA) supervise the banking system 
and have overseen a steady consolidation and strengthening of it. 
The global liquidity crunch, which hit in late summer 2007, 
presented a substantial challenge to the Kazakhstani banking system, 
which had come to rely heavily on external borrowing over the 
preceding five-year period.  Kazakhstani banks had been directing 
much of the borrowed funds into the country's construction and real 
estate sectors, particularly in the form both of construction 
financing and for mortgages for new housing in Astana and Almaty. 
The sudden global liquidity dry-up abruptly left some leading 
Kazakhstani banks unable to continue their aggressive external 
borrowing, forcing them to curtail their domestic lending activity. 
While policymakers widely saw this development as a healthy 
correction in view of the preceding liquidity glut, the National 
Bank of Kazakhstan and the government introduced measures in late 
2007 to provide liquidity to the banking system and inject capital 
in the cooling construction sector. 
Since 1999, a market for debt securities has been rapidly developing 
in Kazakhstan. Several dozen bank and non-bank corporations - large 
and small - have issued bills, notes and bonds with maturities 
ranging from three months to seven years. Earlier issues have 
matured and been redeemed; so far, there have been no defaults. 
Rates for borrowers have declined on average from approximately 16% 
in September 1999 to approximately 9% in 2006. Maturities have 
increased from 1.5 years to up to 10 years during the same period. 
Kazakhstan's pension system reform has boosted the bond market by 
creating a pool of capital. The market for fixed-income securities 
has grown from $74,000 in September 1999 to over $14.7 billion in 
October 2007. 
In 2007, the yield rate on middle-term government notes was 6.35%. 
Longer-term government notes (with maturities up to 10 years) were 
offered at 7.0%. 
The Kazakhstani Stock Exchange (KSE) has been in operation since 
1997. As of December 2007, there were 69 listed companies with 31 
"A-listed" stock issues; 38 companies with "B-listed" stock issues; 
and 5 non-listed issuers. There are also 62 "A-listed" and 26 
"B-listed" corporate bond issues. Inadequate financial records 
prevent many other companies from being put on the exchange. 
Moreover, company managers fear diluting control of their 
enterprises by selling more shares. 
As of October 1, 2007, total capitalization of the KSE was $71.95 
billion, or 70.7% of GDP Though there has been a slight decline of 
capitalization over the second half of 2007,  a continued  annual 
growth in both the absolute value of total capitalization and 
capitalization relative to GDP has occurred for the last three 
years. 
Trading on the KSE is overwhelmingly dominated by block trades, 
liquidity is low, and the spreads are extremely wide. In 2006, 
several large Kazakhstani companies issued initial public offerings 
on the London Stock Exchange (LSE). In compliance with a 2006 law 
requiring any foreign IPO by a Kazakhstani company to be accompanied 
by a domestic issuance, these companies also offered shares on the 
KSE. However, despite these offerings and the Kazakhstani pension 
funds' (see below) tentative moves to invest in KSE-traded shares, 
the exchange remains in a very early stage of development. Due 
largely to Kazakhstani companies' recalcitrance to dilute ownership 
and provide extensive disclosure, the Kazakhstani debt market is 
substantially more developed. The plans for the "Almaty Financial 
Center" (see below) aim to spearhead the development of Kazakhstan's 
 
ASTANA 00000133  010 OF 016 
 
 
financial markets.  In 2007, the Almaty Financial Center officially 
announced that it would merge its efforts to create an effective 
equity market with the KSE, thereby signaling that there will be 
only one stock exchange in Kazakhstan in the foreseeable future.) 
The Financial Supervision Agency (FSA), Kazakhstan's main financial 
regulator, has broad authority over the banking and insurance 
sectors, as well as the stock market.  The FSA is financed from the 
National Bank's budget and subordinated to the President of 
Kazakhstan. 
In 1998, the government introduced an accumulation pension system 
that requires all employed persons to contribute 10% of their salary 
to accumulation pension funds. As of November 2006, the 14 funds (13 
private and one state-owned) operating in Kazakhstan held 
approximately $9.6 billion in assets. Asset management companies 
invest the contributions on behalf of the pension funds. While the 
government provides specific restrictions on how the pension funds 
may invest, these restrictions were relaxed in 2006, allowing some 
involvement in Kazakhstani equities. Still, the pension assets must 
be invested primarily in specific categories of instruments, such as 
government bonds and A-listed securities. The largest concentration 
of investments is in dollar-denominated Kazakhstani Eurobonds. 
Custodian banks hold pension assets. The government plans to sell 
some shares of state enterprises on the national stock market, 
partly to provide a more profitable alternative vehicle for the 
investment of pension fund assets. 
There appear to be no "cross-shareholding" or "stable shareholder" 
arrangements used to res
trict foreign investment in private firms 
through mergers and acquisitions. Joint stock companies may not 
cross-hold more than 25% of each other's stock unless they have an 
exemption codified by law and may not exercise more than 25% of the 
votes in a cross-held joint stock company. Kazakhstani law 
recognizes companies as "related" if one company or legal entity 
holds more than 20% of the shares of another. However, the owning 
company may not vote more than 25% of the total shares at the 
general meeting of shareholders of the related company. The general 
meeting must approve various corporate actions, such as mergers and 
acquisitions. This rule applies to all persons, domestic or foreign. 
 
There have been very few hostile takeovers in Kazakhstan, primarily 
because there are few publicly traded firms. Defensive measures are 
not targeted toward foreign investors in particular. Current 
legislation provides a legal framework for takeovers. The Civil Code 
requires a company that has purchased a 20% share in another company 
to publish information about the purchase. 
The mutual investment fund industry remains small but is growing 
rapidly.  As of October, 1 2007, total assets of the mutual 
investment funds amounted to $1.16 billion, representing a 302% 
increase when compared to October 2006 figures. Despite a reduction 
from 37.1% in October 2006 to 15.77% in October 2007, Kazakhstani 
corporate securities remain a significant share of the consolidated 
mutual fund investment portfolio. 
The 1998 Law on Joint Stock Companies provides the basis for the 
regulation of open and closed-type joint stock companies. It also 
contains clauses to protect investors in often-abused circumstances, 
such as: 
-- issuance of additional shares; 
-- maintenance of charter capital and restrictions on payments of 
dividends; 
-- re-purchase by a company of its own shares; 
-- debt-to-equity conversions; 
-- fiduciary duties imposed on company officers; 
-- proxy votes; 
-- independent audit; and 
-- the determination of asset values during the sale of company 
property. 
The Law on Joint Stock Companies also regulates tender offers for 
stock of open joint stock companies by requiring the purchaser to 
notify the Financial Supervision Agency and the target company of 
their intention to purchase 30% or more of the target company and, 
after such purchase, to make an offer to all remaining shareholders 
to purchase their shares at the average price during the last six 
months before the purchase. 
There are no laws or regulations specifically authorizing firms to 
adopt articles of incorporation or associations that limit or 
prohibit foreign investments. The Law on Joint Stock Companies, 
however, allows charter limits on the number of shares or votes that 
one shareholder may have. 
In March 2007, the Government accepted amendments to legislation 
regarding the protection of minority stockholders' interests.  The 
enactment of this law was prompted by numerous violations of 
minority stockholders' interests. In addition, this step was driven 
by the Government's intention to promote the development of stock 
exchange. 
Standards, including sanitary and phyto-sanitary standards, are 
promulgated solely by the Committee for Technical Regulation and 
Metrology (Gosstandard). Proposals for adoption, amendment, or 
abolishment of state standards are normally prepared by technical 
committees constituted by Gosstandard, and may include producers, 
 
ASTANA 00000133  011 OF 016 
 
 
scientific and engineering associations, and technical experts. 
Foreign participation in the standardization process is regulated by 
international multilateral and bilateral agreements. 
 
Political Violence 
------------------ 
There have been no incidents of politically-motivated violence 
against foreign investment projects. Kazakhstan has been stable 
since independence. Politically-motivated civil disturbances remain 
exceptionally rare. Kazakhstan has good relations with its 
neighbors. The government continues to express concern over the 
security of its borders with Kyrgyzstan and Uzbekistan, which it 
views as vulnerable to penetration by extremist groups. 
Kazakhstan's 2007 parliamentary elections took place without 
significant violence or unrest. President Nazarbayev's Nur Otan 
party won every seat in the lower house of parliament with an 
overwhelming majority of the votes. In its assessment, the OSCE 
noted that the election did not meet a number of OSCE commitments 
and international standards for democratic elections. Although 
opposition groups denounced the election as fraudulent, there were 
no significant demonstrations against the announced results. The 
next parliamentary election is scheduled to take place in 2012. 
The February 2006 murders of a prominent opposition politician and 
his two associates were perceived by opposition parties as 
politically motivated. The former chief of staff of the Senate was 
convicted in August 2006 of having ordered the murders; prosecutors 
charged that he was motivated by personal animosity. 
 
Corruption 
---------- 
Although the Kazakhstani Criminal Code contains special penalties 
for accepting and giving bribes, corruption is prevalent throughout 
Kazakhstan. The Ministry of Interior, the Financial Police, the 
Disciplinary State Service Commission, and the Committee for 
National Security (KNB) are responsible for combating corruption. 
The government has taken some measures to address corruption and 
increased its attention to the problem through educational and 
public awareness efforts.  President Nazarbayev publicly deplored 
corruption and encouraged media to report about it.  Some lower and 
middle-ranking officials and minor political figures have been 
penalized on corruption charges. 
Transparency International has a national chapter in Kazakhstan. The 
government has signed on to the Extractive Industries Transparency 
Initiative (EITI). 
U.S. firms have cited corruption as a significant obstacle to 
investment. Law enforcement agencies have on occasion t pressured 
foreign investors perceived to be uncooperative with the government. 
The government and local business entities are widely aware of the 
legal restrictions placed on U.S. business abroad (i.e., the Foreign 
Corrupt Practices Act). 
In 2003 in the United States two American citizens were charged with 
violating the Foreign Corrupt Practices Act in a case that received 
significant international media attention. The two allegedly 
channeled tens of millions of dollars in bribes to two senior 
Kazakhstani officials during the 1990's in order to facilitate oil 
deals for American companies. One is currently serving a jail term. 
The trial of the second defendant, James Giffen, began in 2007 in 
Southern New York Federal District court. 
 
Bilateral Investment Agreements 
------------------------------- 
The United States-Kazakhstan Bilateral Investment Treaty came into 
force in 1994. In 1992, the United States and Kazakhstan signed an 
Investment Incentive Agreement. 
In 1996, the Treaty on the Avoidance of Double Taxation between the 
United States and Kazakhstan came into force. However, an ongoing 
dispute with a U.S. inv
estor raises concerns with the government's 
tax treaty compliance. Since independence, Kazakhstan has ratified 
treaties on the avoidance of double taxation with 41 countries. 
Kazakhstan has bilateral investment agreements in force with  forty 
countries, including the United States, Great Britain, Germany, 
France, Austria, Russia, Korea, Iran, China, and Turkey. 
 
OPIC and Other Investment Insurance Programs 
-------------------------------------------- 
The Overseas Private Investment Corporation (OPIC), an independent 
U.S. Government agency that provides project financing, political 
risk insurance, and a variety of investor services, has been active 
in Kazakhstan since 1994. OPIC is seeking commercially viable 
projects in the Kazakhstani private sector. OPIC offers a full range 
of investment insurance and debt/equity stakes. 
Kazakhstan is a member of the Multilateral Investment Guarantee 
Agency (MIGA). 
 
Labor 
----- 
The 1999 Labor Law and the Constitution guarantee basic workers' 
rights, including the right to organize and the right to strike. 
 
ASTANA 00000133  012 OF 016 
 
 
Teachers, miners and workers at a variety of enterprises have 
conducted occasional strikes for generally short periods during the 
past several years. In September 2006 the death of 41 miners in an 
explosion at Mittal Steel Termirtau's "Lenin" coal mine triggered an 
unprecedented wave of strikes. Mittal's striking coal miners were 
joined by steel workers which shut down operations at each of the 
eight coal mines owned by the company for a week. The strike ended 
after Mittal agreed to substantial raises. Subsequently, two U.S. 
companies operating coal mines in Kazakhstan raised wages 25-30% in 
order to avert threatened strikes. 
The 1996 Law on Labor Disputes and Strikes lays out the procedure 
for resolving disputes. However, the law also restricts strikes by 
requiring, inter alia, that a peaceful attempt at a solution first 
be made, that two-thirds of the labor collective must approve the 
strike, and that the employer must be warned 15 days in advance in 
writing. In addition, strikes for political purposes are forbidden. 
 
A separate 1992 Law on Collective Bargaining Agreements sets out the 
basic framework for concluding such agreements. There are instances 
of unions successfully negotiating collective bargaining agreements 
with management. 
In May 2007, Kazakhstan passed a new Labor Code, encompassing all 
the preceding legislation under a single umbrella.  Key provisions 
of all the previous labor laws were retained.  The Labor Code 
extended  minimum mandatory vacation time from 18 to 24 days, 
provided an outline of labor unions' and labor representatives' 
rights, and toughened rules governing the dissolution of labor 
contracts. 
The 1993 Law on Professional Labor Unions provides a legal guarantee 
against limitations of labor. It also grants socio-economic, 
political and personal rights and freedoms as a result of membership 
in a union and prohibits the denial of employment, the denial of 
promotion or termination of employment on the basis of such 
membership. Kazakhstan also joined the International Labor 
Organization (ILO) in 1993. As of January 2007, Kazakhstan has 
ratified 16 ILO conventions, including those pertaining to minimum 
employment age, forced labor, discrimination in employment, equal 
remuneration, and collective bargaining. 
Kazakhstan's economy has grown steadily in the last five years. 
Preliminary 2007 GDP growth is estimated at 8.7%.  (The highest 
year-on-year rate was 13.5% in 2001.) Although incomes and consumer 
spending have risen across the board, in the 3rd quarter 2007 the 
minimum subsistence wage is still only $83.. per month;   with 13.8% 
of the population receiving income below that level. Starting on 
January 1, 2008, the minimum pension  will be $65.45 per month. By 
government estimates, in the 3rd quarter of 2007 unemployment was 
7%. 
Kazakhstan has an educated and technically competent workforce. 
However, the demand for specialized skilled labor created by the 
simultaneous development of several major oil fields in western 
Kazakhstan has exceeded locally available supply. Foreign investors 
increasingly cite a lack of skilled workers and technical 
professionals. Management expertise and marketing skills are also in 
short supply. Many large investors rely on foreign workers, 
particularly from Turkey, to fill the vacuum. In turn, the GOK has 
made it a priority to ensure that Kazakhstani citizens are 
well-represented on foreign enterprise workforces, and is 
particularly keen to see Kazakhstanis hired into the managerial and 
executive ranks of those enterprises. In late 2006, the government 
discussed measures limiting the inflow of foreign workers, 
particularly unskilled, and pressuring large foreign investors to 
hire and train Kazakhstanis. Since 2001, the quota system has 
required employers to search for local workers prior to the issuance 
of work permits for foreigners (see section A.1.). U.S. companies 
are strongly advised to contact locally-based law and accounting 
firms, as well as the U.S. Commercial Service in Almaty, for the 
latest information on work permits. 
Employers' reliance on foreign labor in the face of persistent 
poverty in rural Kazakhstan became a political issue in 2006 and 
2007. The debate revolved around the underlying causes of some 
violent incidents between Kazakhstani and foreign workers. The 
tension was epitomized by a major October 2006 brawl that involved 
over 400 workers. Policymakers often point to disparities in wages 
and working conditions between Kazakhstani and foreign workers. 
Employers retort that the domestic lack of skilled labor frequently 
necessitates management of Kazakhstani laborers by foreigners. 
 
Foreign - Trade Zones/Free Ports 
-------------------------------- 
A system of tax preferences exists for enterprises engaging in 
prescribed economic activities in the so-called "special economic 
zones." As of December 2007, four such zones had been established: 
the "New Administrative Center" in Astana, the Seaport of Aktau, the 
Alatau Information Technology Park (near Almaty), and the Ontustik 
Cotton Center in south Kazakhstan.). In addition, a separate 
preferential tax system exists for enterprises manufacturing high 
value-added goods, regardless of location. 
In the second half of 2006, the government took steps toward 
 
ASTANA 00000133  013 OF 016 
 
 
establishing the Almaty Financial Center, a legal and institutional 
framework aimed at making Almaty the financial capital of Central 
Asia. The plans, which are still in very early stages of 
implementation, include tax privileges for major participants in the 
financial marketplace: investors, broker-dealers, and issuing 
corporations. The legal framework for the Almaty Financial Center 
includes a specialized court with jurisdiction over civil disputes 
between the Financial Center's participants 
 
Foreign Direct Investment (FDI) Statistics 
------------------------------------------ 
Annual Gross Foreign Direct Investment Flows by Country of Origin 
(Millions of Dollars; nominal) 
1993-20052006  2007(1st h
alf) Total 
USA 11,841.2  1,694.7  802.2 14,338.1 
UK 4,378.7  852.5  255.2  5,486.4 
South Korea 1,880.9  248.6  116.6  2,246.1 
Italy 2,468.3 376.1  212.6  3,057 
Canada 1,481.2  437.1  273  2,191.3 
Switzerland 2,021.5  234.6  367.9  2,624 
Netherlands 4,940.1  2,877.3  1,170.6  8,988 
China 1,680.5  359.5  171.6  2,211.6 
Turkey 906.9   92.9  141.9  1,141.7 
Russia 1211.1  490.9  219.0  1,921 
Japan 1005.1  342.6  169.7  1,517.4 
Others 6,970  2,559.9  3,033.6  12,563.5 
TOTAL 40785.5  10,566.7  6,933.9   58,286.1 
Source: National Bank of Kazakhstan 
 
Annual Gross Foreign Direct Investment Flows by Sector (Millions of 
dollars; nominal) 
1993-2005  2006  2007 (1st half)  Total 
 
AGRICULTURE, 15.7  37.3  1.3  54.3 
HUNTING AND 
FORESTRY 
 
MINING AND  22,286.2  2,323.1  2,126.4   26,735.7 
QUARRYING 
 
mining of coal 39.8  0.0  0.0  39.8 
and lignite, 
extraction 
of peat 
 
extraction of  20,406.3  2,003.4  1886.3  24,296 
crude 
petroleum 
and natural 
gas 
 
mining of 146.5  162.4  83.7  392.6 
uranium and 
thorium ores 
 
mining of 884.6  149.1  156.2  1,189.9 
metal ores 
 
other mining 
and quarrying 50.9  8.3  0.1  55.5  114.8 
 
MANUFACTURING  5,066.4  644.4  326.1  6,036.9 
 
including but 
not limited 
manufacture of 
food products, 644.7  51.9  19.8  716.4 
beverage and 
tobacco products 
 
manufacture of 
coke, refined 
petroleum 
products 508.2 -15.8 -192.8 299.6 
and nuclear 
fuel 
 
manufacture of 139.8  17.9  7.9  165.6 
chemicals 
and chemical 
products 
 
manufacture of 32.9   7.9  12.3  53.1 
rubber and 
plastics 
products 
 
manufacture of 85.9  26.2  13  125.1 
 
ASTANA 00000133  014 OF 016 
 
 
other 
non-metallic 
mineral products 
 
manufacture 3,068.7   423.9  385.8  3,878.4 
of basic metals: 
manufactures 405.7  1.4  1.6  408.7 
of ferrous 
metals 
 
manufacture of 2,649.3  419  381  3,449.3 
basic precious 
and non-ferrous 
metals 
 
manufacture of 13.9  3.4  3.3  20.6 
fabricated 
metal products 
except 
machinery 
and equipment 
 
manufacture 21.4  4.2  0.1  25.7 
of machinery 
and equipment 
 
manufacture 431.1  39.7  20.4  491.2 
of electric 
and computing 
machinery 
 
manufacture of 11.8  72.4  53.9  138.1 
transport 
equipment 
 
manufacture, 5.0  0.7  1.6  7.3 
n.e.c 
 
ELECTRICITY, 699.2  26.6  5.3  731.1 
GAS AND WATER 
SUPPLY 
 
CONSTRUCTION 416.1  378.4  243.8  1,038.3 
 
WHOLESALE AND 1,122.8 760.9  618.7  2,502.4 
RETAIL TRADE, 
REPAIR OF 
MOTOR VEHICLES, 
MOTORCYCLES 
AND PERSONAL AND 
HOUSEHOLD GOODS 
 
HOTELS AND 115.3  10.2  43.5  169 
RESTAURANTS 
 
TRANSPORT690.6  301.3  48.5  1,040.4 
STORAGE AND 
COMMUNICATION 
land transport 378.8  23.6  20.6  423 
 
including 
transport 
via pipelines 360.3  19.4  20.6  400.3 
 
water -12.2  4.1  0.6  -7.5 
transport 
 
air transport 24.9  3.2  1.1  29.2 
 
supporting 152.3  187.4  29.5  369.2 
transport 
activities 
 
post and 146.8  83  -3.2  226.6 
telecommunication 
 
including 145  81.1  -4.0  222.1 
telecommunication 
 
FINANCIAL 494.2  375  201.6  1070.8 
ACTIVITY 
 
REAL ESTATE, 9,223.3   5,610.1  3,271  18104.4 
RENTING 
AND BUSINESS 
ACTIVITIES 
 
Including 
 
ASTANA 00000133  015 OF 016 
 
 
but not limited 
real estate 
activities 105.1 29.1 30.6 164.8 
 
legal, 
accounting, book- 
keeping and 
auditing                   143.2 -22.5 49.6  170.3 
activities, 
tax consultancy, 
market research, 
business and 
management 
consultancy 
geological  8,739.5 5,487.5 3,167.6 17,394.6 
exploration and 
prospecting 
activities 
 
EDUCATION, 295.3  99.5  47.5  442.3 
HEALTH AND 
SOCIAL WORK 
 
ACTIVITIES, 360.8  0.0  0.0  360.8 
N.E.C. 
 
TOTAL      40, 785.5  10,566.7 6,933.9   58 286.1 
Source: National Bank of Kazakhstan 
 
FDI as a Percentage of GDP 
2005   2006  2007(1st half) 
11.58% 13.05% 15.5% 
Source: National Bank of Kazakhstan 
 
Kazakhstani Direct Investment Outflows 
Millions of US dollars, nominal 
Country of 
Destination 2004-2005 2006 2007(1st half) Total 
Austria   0.4     0.3       0.1    0.8 
Azerbaijan 0.0    3.2       3.4     6.6 
Armenia 2.8     0.7       0.0   3.5 
Afghanistan 0.1  -0.1  0.0   0.0 
Byelorussia 3.4  1.5  0.1   5.1 
Bulgaria   0.0  0.0  0.7   0.7 
Dominican Republic 0.0 10.0 0.0   10.0 
France   0.0  0.0  3.0  3.0 
Great Britain 15.5  -3.7  82.1   93.9 
Virgin Islands 43.225.4  78.9   147.5 
Germany 217.3  0.2  10.4  227.9 
Georgia 1.9  66.0  9.2   77.1 
Hong Kong 0.0  0.0  60.0   60.0 
Israel  0.0  0.4  0.0   0.4 
India  0.0 0.1  0.1   0.2 
Iran  0.0  0.0  0.3   0.3 
Italy  0.1  0.0  0.0   0.1 
Canada  5.8  37.3  0.0   43.1 
Cayman Islands 0.0 0.5  0.0  0.5 
Cyprus 0.0  0.8  88.8   89.6 
China  6.0  7.1  34.5   47.6 
Kyrgyzstan 57.4  102.8  55.4   215.6 
Latvia  1.9  0.0  0.3   2.2 
Lithuania 0.0  -5.0  0.0   -5.0 
Luxemburg 0.0  9.5  1.7   11.2 
Malaysia  0.0  0.8  0.7  1.5 
Marshall Islands 0.0 0.0  96.0  96.0 
Isle of Man   6.6  0.0  0.0  6.6 
Mongolia 0.1  0.0  0.0   0.1 
Netherlands 17.5  639.4 17.6  674.5 
Nigeria 0.0  0.0  0.1   0.1 
Arab Emirates 0.0 1.4  37.7   39.1 
Russian Federation 127.2  183.3  198.1  508.6 
Seychelles 28.3  0.0  0.0   28.3 
Singapore 0.0  2.4  61.7   64.1 
South Korea 0.0  0.0  1.1     1.1 
Spain 0.0  0.0  1.0      1.0 
USA 8.1   3.2  0.4   11.7 
Tajikistan 0.1  12.3  10.7    23.1 
Thailand 0.0  0.0  0.2      0.2 
Turkey 41.2 3.9  318.3  363.4 
Uzbekistan 8.0  86.0  14.3   108.3 
Ukraine 10.1  2.0  8.7   20.8 
Check Republic -4.00.2  2.0   -1.8 
Switzerland 127.1 77.1  157.5   361.7 
Estonia 0.0  0.0  0.0   0.0 
Other 
Countries 6.5  4.0  0.7   11.2 
TOTAL  732.6  1,273.0  1,356   3,361.6 
Source: National Bank of Kazakhstan 
 
ASTANA 00000133  016 OF 016 
 
 
 
Investments as of 2007 
---------------------- 
The oil and gas sector accounts for approximately 71.5% of the $58.3 
billion that has been invested in Kazakhstan, with U.S. firms 
consistently ranking as the largest foreign investors. U.S. firms 
with noteworthy investment in Kazakhstan's petroleum sector include: 
Chevron, ExxonMobil, and ConocoPhillips. Other major foreign 
investors in this sector include: LucArco, Agip, Shell, Inpex, Eni, 
Total, British Gas, Lukoil, Mitsubishi and the Chinese National 
Petroleum Corporation (CNPC). 
Other major US investments include: AES (over $200 million in power 
generation), Access Ind
ustries (coal mining), Philip Morris (over 
$320 million in tobacco processing), and General Electric 
Transportation (locomotive modernization facility). Non-petroleum 
foreign investors include Mittal and BAE Systems. 
 
ORDWAY

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08ASTANA128, KAZAKHSTAN CONTINUES SUPPORT FOR TIFA, REQUESTS

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08ASTANA128 2008-01-28 08:49 2011-08-30 01:44 UNCLASSIFIED//FOR OFFICIAL USE ONLY Embassy Astana

VZCZCXRO2469
RR RUEHAST RUEHBI RUEHCI RUEHLH RUEHLN RUEHPW RUEHVK RUEHYG
DE RUEHTA #0128 0280849
ZNR UUUUU ZZH
R 280849Z JAN 08
FM AMEMBASSY ASTANA
TO RUEHC/SECSTATE WASHDC 1551
INFO RUCNCIS/CIS COLLECTIVE 0375
RUCNCLS/SOUTH AND CENTRAL ASIA COLLECTIVE
RUEHAST/USOFFICE ALMATY 0149

UNCLAS ASTANA 000128 
 
SIPDIS 
 
DEPT FOR SCA/CEN - O'MARA 
 
SENSITIVE 
 
SIPDIS 
 
E.O. 12958:  N/A 
TAGS: ETRD EFIN ECON PREL AF KG TI TX UZ
SUBJECT:   KAZAKHSTAN CONTINUES SUPPORT FOR TIFA, REQUESTS 
ESTABLISHED FUTURE AGENDA 
 
REF:   A. 07 State 170917,  B. State 1132 
 
1.  (SBU) Econoff delivered Ambassador Donnelly's letter to  Vice 
Industry and Trade Minister Aitzhanova(Reftel A) on January 15 via 
Damigul Kabieyeva, Head of the Ministry's WTO accession department. 
Econoff simultaneously delivered TIFA demarche points (Reftel B) to 
Kabiyeva and her deputy, Saadat Assanseiteva. 
 
2. (SBU) Kabiyeva reiterated Kazakhstan's support for the proposed 
TIFA Council Meeting to be held in June/July 2008.  She shared the 
GOK's concerns about the organization of the event in either 
Dushanbe or Ashgabat, and wanted to know if the meeting would 
definitely be held in one of those cities, or if other sites could 
be considered.  She contended that Turkmenistan and Tajikistan's 
limited budgets may impact the effectiveness of the event.  She 
acknowledged, however, that 2008 TIFA Council Meetings held in 
either location might provide a needed economic stimulus.  Kabiyeva 
also inquired whether or not requirements would be made of 
Turkmenistan and Tajikistan regarding the size of their 
participating delegations. 
 
3.  (SBU) Kabiyeva said that after three years of participation in 
TIFA, the GOK feels that there are few demonstrated results and 
remains anxious to see TIFA and the Council Meetings "go from 
dialogue to practical measures."  Both she and Assanseiteva agreed 
that the theme of streamlining customs processes would be 
advantageous. Kabiyeva strongly supported the involvement of private 
sector representatives and was amenable to facilitating regional 
working groups prior to the Council Meeting. 
 
4.  (SBU) Kabiyeva recommended creating an established agenda of 
locations and themes for future Council Meetings based on a 
consistent rotating roster of hosts and issues (similar in structure 
to the Eurasian Economic Community.)  This structure, she added, 
would allow for the more effective inclusion of desired private 
sector representatives. Kabiyeva also recommended regular systematic 
meetings held at different levels prior to the Council Meetings, 
organized such that concrete negotiations could be held and 
agreements (such as MOUs between business groups) signed during the 
plenary. Her final recommendation was to invite representatives from 
other organizations involved in similar work (such as the EEC) to 
participate in the meeting. 
 
5.  (SBU) Kabiyeva noted that she and Vice Minister Aitzhanova have 
not discussed in detail their official recommendations for the 2008 
TIFA Council Meeting.  She promised an official response in writing 
by February 15. Kabiyeva also requested information regarding the 
composition of the proposed U.S. private sector delegation. 
 
ORDWAY

Wikileaks

08ASTANA91, KAZAKHSTAN: ALL SIDES SMILING WITH KASHAGAN DEAL

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Reference ID Created Released Classification Origin
08ASTANA91 2008-01-18 08:44 2011-08-30 01:44 CONFIDENTIAL Embassy Astana

VZCZCXYZ0002
OO RUEHWEB

DE RUEHTA #0091/01 0180844
ZNY CCCCC ZZH
O 180844Z JAN 08
FM AMEMBASSY ASTANA
TO RUEHC/SECSTATE WASHDC IMMEDIATE 1510
INFO RUCNCIS/CIS COLLECTIVE PRIORITY 0369
RUEHAK/AMEMBASSY ANKARA PRIORITY 2121
RUEHLO/AMEMBASSY LONDON PRIORITY 0507
RUEHRO/AMEMBASSY ROME PRIORITY 0375
RUEHVEN/USMISSION USOSCE PRIORITY 1861

C O N F I D E N T I A L ASTANA 000091 
 
SIPDIS 
 
SIPDIS 
 
E.O. 12958: DECL: 01/18/2018 
TAGS: EPET EINV ECON KZ
SUBJECT: KAZAKHSTAN: ALL SIDES SMILING WITH KASHAGAN DEAL 
 
Classified By: Ambassador John Ordway, Reasons 1.4 (b) and (d) 
 
------- 
SUMMARY 
------- 
 
1. (C) In a marathon negotiating session on January 13, the 
Kashagan consortium partners reached agreement in principle 
with the Government of Kazakhstan (GOK) on restructuring the 
ownership and operatorship of the project, overcoming two 
main stumbling blocks.   ENI had objected to a new operating 
model; ExxonMobil had rejected the price for the equity stake 
transferred to KazMunayGaz (KMG), Kazakstan's national oil 
and gas company.  With the CEOs of all six foreign partners 
and Kazakhstani Prime Minister Masimov in the same room, ENI 
and ExxonMobil found themselves isolated and eventually 
joined the consensus.  The parties agreed to an equity 
transfer to KMG that will result in KMG -- and thus the GOK 
-- having a Kashagan ownership share equal to that of the 
four largest consortium partners.  They also agreed to a new 
operating model which will bring ExxonMobil, Shell and Total 
in as co-operators, each with a specific area of 
responsibility.  KMG will share in overall management, and 
intends to ensure smooth and effective relations among the 
operating companies.  End Summary. 
 
2. (C) This cable is based on separate, extensive 
conversations after the agreement was reached with senior 
in-country management for ExxonMobil and ConocoPhillips, and 
with Maksat Idenov, KMG's first vice president. 
 
------------ 
OPERATORSHIP 
------------ 
 
3. (C) ENI has been the operator during the initial phase of 
Kashagan -- the world's largest oil discovery since Alaska's 
North Slope.  By all accounts from companies within and 
outside the consortium, ENI does not have the capacity to 
operate a project of this complexity, which will entail 
extraction of sour oil under extremely high pressures using a 
complex and potentially dangerous gas reinjection scheme. 
The result has been repeated delays and massive cost 
overruns.  The consortium partners we have been in regular 
contact with (ExxonMobil, ConocoPhillips and Shell) have been 
telling us privately since at least 2004 that ENI was in over 
its head.  All the parties except ENI had long come to the 
conclusion that a new operating model was required. 
 
4. (C) All of our interlocutors described ENI as being in 
denial until the very last moment of the negotiations about 
their inability to continue as Kashagan operator.  KMG First 
Vice President Maksat Idenov told us that he had worked with 
ExxonMobil, ConocoPhillips and Shell to devise an approach 
that would have the GOK, rather than the international 
companies, demand a change in the consortium's operating 
structure.  In the course of the final nine-hour negotiating 
session, ENI CEO Paolo Scaroni, completely isolated and under 
attack particularly from ExxonMobil and Shell, finally gave 
in.  The new arrangements, which will be worked out among the 
four majors involved within the next 4-6 weeks, envision 
dividing the operatorship into different aspects, including 
offshore, onshore, and drilling.  The companies will reach 
the decision on who does what based on capabilities and 
availability of the appropriate expertise. 
 
--------------------- 
COMPENSATION/FINANCES 
--------------------- 
 
5. (C) In addition to the value transfer as a result of KMG's 
acquiring additional equity (para 6), the January 13 Kashagan 
deal also includes cash compensation to KMG.  The most 
significant component is a $250,000,000 bonus payment to be 
made upon the commencement of production.  ExxonMobil had 
tried to mitigate the value transfer by seeking a 10 year 
extension of the PSA, later reducing their demand to 5 years 
and then 3 years.  The GOK stood firm, but did agree to give 
the current partners a right of first refusal on any 
extension or new PSA at its expiry.  (Note:  The size of the 
field and the delays in beginning production make it very 
likely that there will be substantial oil still in the ground 
when the current PSA expires.  Given the reinjection of sour 
gas and high pressure in the fields, it is likely that even 
at that point the project will continue to be technically 
demanding and require the involvement of international 
majors. End Note.) 
 
6. (C) Our intelocutors report that at no point during the 
negotiations did the GOK request the international partners 
to assume any responsibility for financing KMG's very large 
cash calls for capital expenditures and operating expenses 
over the next several years.  Idenov told us that KMG plans 
to finance part of these cash calls through its own 
resources, and part by debt financing.  He is planning a 
series of meetings with selected major European and Japanese 
banks over the next month or so to begin to line up 
commitments. 
 
--------- 
OWNERSHIP 
--------- 
 
7. (C) The GOK had signaled early on that it was seeking &#x00
0A;additional equity ownership to bring KMG's share in Kashagan 
up to the same level as the four large stakeholders -- ENI, 
Shell, Total and ExxonMobil -- and that it expected part of 
the compensation it felt it was due for delays and cost 
overruns to be reflected in the purchase price for KMG's 
additional stake.  In the initial stages of the negotiation, 
it appeared that the GOK was preparing an all-out assault to 
get the consortium partners to agree to dilution of their 
shares.  The GOK's arsenal included environmental charges, 
tax charges, labor violations, operating permits, the 
requirement for GOK approval of the operating budget and, 
most ominously, a new subsoil law that provided a potential 
legal basis to revoke the PSA.  As serious negotiations got 
underway, however, all of these threats receded.  (Note: The 
one exception was a threat by President Nazarbayev in a 
December  meeting with Tillerson's deputy to use the subsoil 
legislation.  Nazarbayev, however, reverted to his previous 
public line when he reassured the Ambassador privately the 
next day that the legislation would not/not be used against 
any existing contract.  End Note.)  In the end, both 
ExxonMobil and ConocoPhilips confirmed that the GOK used 
tough, but legitimate business pressures to pursue their case. 
 
8. (C) ExxonMobil was the last holdout in agreeing to an 
increased ownership share for KMG.  After Exxon signaled its 
willingness late last year to reduce its stake, the 
negotiations focused on the price for KMG's share. 
ExxonMobil, however, took a position of principle:  it would 
accept no less than "market price."  ExxonMobil told us that 
CEO Rex Tillerson had decided that Exxon was going to hold 
the line on this issue.  However, all our sources indidated 
that Tillerson was subjected to very strong pressure in the 
final negotiations, both by the other CEOs and by the 
Kazakhstani side.  According to our in-country ExxonMobil 
contact (who was not in the meetings but who was extensively 
debriefed about them), it was the lure of future business in 
Kazakhstan that eventually led Tillerson to reverse course, 
and to agree to a "below market price" figure of $1.8 billion 
as the valuation of KMG's increased share. (Note: 
Determining the "market price" for this share is essentially 
impossible, as different financial models will yield wildly 
varying results depending on the assumptions used.  That 
said, all parties involved agree that $1.8 billion is a 
"below market price," even if they can not tell you how much 
below market.  End Note.) 
 
9.  (C)  ExxonMobil has been pursuing a major and innovative 
on-shore proposal with the GOK for the past 18 months that 
would build on the company's acknowledged industry-leading 
skills and, if successful, produce major additional revenues 
for Kazakhstan.  It was made explicit to ExxonMobil that 
failure to agree to the restructuring proposal would result 
in their losing any chance of additional business in 
Kazakhstan -- permanently.  It apparently was the lure of 
this opportunity that persuaded ExxonMobil to accept what all 
the other majors had already agreed to.  ExxonMobil told us 
that no promises were made about any future business, and the 
GOK is on the record publicly as saying that there were no 
side deals made.  However, Idenov strongly hinted to us that 
an agreement with ExxonMobil was imminent -- and went out of 
his way to praise Exxon's professionalism, high standards, 
and critical role in the new operatorship arrangements for 
Kashagan.  He claimed he had told Tillerson that ExxonMobil 
could have first pick on the aspect of the operatorship they 
wanted.  The ExxonMobil office in Astana is scouring the town 
for new office space, and is anticipating the imminent 
arrival of more business development cadres. 
 
------- 
COMMENT 
------- 
 
10. (C) While KMG will benefit from some relatively modest 
guaranteed cash transfers, the real financial gain from the 
Kashagan deal for Kazakhstan is a greater share of upside 
potential if oil prices remain high -- though coupled with 
greater downside risk if prices drop or production does not 
materialize as projected.   ExxonMobil evidently decided that 
the risk of being permanently shut out of development 
prospects in Kazakhstan was not worth the further argument on 
the market value of its existing Kashagan stake.  For its 
part, ConocoPhillips is also bullish on its prospects in 
Kazakhstan over the next few years.  They have offered to 
second technical experts to KMG, at no cost, to help them 
evaluate the N Block that Shell and ConocoPhillips had fought 
so hard over, and that KMG is now going to explore on its 
own.  Idenov apparently has high regard for ConocoPhilips CEO 
Jim Mulva -- a fact that may further work to the benefit of 
the company.  End Comment. 
ORDWAY

Wikileaks

08ASTANA66, SENATOR LUGAR MEETS WITH GOVERNMENT LEADERS IN

WikiLeaks Link

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Reference ID Created Released Classification Origin
08ASTANA66 2008-01-14 11:34 2011-08-30 01:44 CONFIDENTIAL Embassy Astana

VZCZCXYZ0001
PP RUEHWEB

DE RUEHTA #0066/01 0141134
ZNY CCCCC ZZH
P 141134Z JAN 08
FM AMEMBASSY ASTANA
TO RUEHC/SECSTATE WASHDC PRIORITY 1486
INFO RUCNCIS/CIS COLLECTIVE PRIORITY 0364

C O N F I D E N T I A L ASTANA 000066 
 
SIPDIS 
 
SIPDIS 
 
STATE FOR SCA/CEN M. O'MARA 
 
E.O. 12958: DECL: 01/14/2018 
TAGS: PGOV PREL EPET ENRG KZ
SUBJECT: SENATOR LUGAR MEETS WITH GOVERNMENT LEADERS IN 
ASTANA 
 
REF: ASTANA 56 
 
Classified By: AMBASSADOR ORDWAY FOR REASONS 1.4(B) and (D) 
 
 1. (C) Summary:  During his January 9-11 visit to Astana 
Senator Richard Lugar discussed energy, non-proliferation, 
regional security, and economic cooperation issues in a 
series of meetings with high-ranking officials. Kazakhstani 
officials praised Senator Lugar for his long support of 
Kazakhstan, particularly through the Nunn-Lugar act, and 
described U.S.- Kazakhstan relations as healthy.  Several 
interlocutors assured Senator Lugar that the recently signed 
 amendment extending and broadening the Cooperative Threat 
Reduction (CTR) agreement will be quickly ratified.  Prime 
Minister Masimov expressed interest in participating in an 
event with Senator Lugar in Washington this year to 
commemorate cooperation under the Nunn-Lugar Act.  End 
Summary. 
 
Non-Proliferation 
----------------- 
 
2. (C) Senator Richard Lugar met with Prime Minister Karim 
Masimov, Foreign Minister Marat Tazhin, State Secretary 
Kanat Saudabayev, Minister of Energy and Natural Resources 
Kauat Mynbayev, Minister of Health Anatoliy Dernovoy and 
KazMunayGaz First Vice President Maksat Idenov during his 
January 9-11 visit to Astana.  Senator Lugar thanked his 
interlocutors for their efforts to extend and broaden the 
Cooperative Threat Reduction Agreement and asked for their 
assistance to ensure that the amendment is quickly 
ratified.  Energy Minister Mynbayev told the Senator that 
Kazakhstan will accelerate the ratification process and 
that he does not foresee any problems.  Senator Lugar 
emphasized to Mynbayev and others that time is of the essence 
 because of political pressures within the U.S. to 
demonstrate that the program is on track.  He also reminded 
the Kazakhstanis that the U.S. has an additional $64 
million it is prepared to spend in Kazakhstan on CTR 
programs. 
 
3. (C) Senator Lugar made a strong push for a decision from 
Kazakhstan on the location of a national human-veterinary 
central reference laboratory, funded by the United States. 
Foreign Minister Tazhin and Health Minister Dernovoy both 
replied that the construction of the U.S.-proposed joint 
human- 
veterinary lab may not be possible for Kazakhstan.  Senator 
Lugar's delegation noted that a separate plan forwarded by 
the 
Ministry of Health would add two years to completion of the 
project.  Tazhin said that Kazakhstan is still looking to 
find 
a compromise solution with the Department of Defense. 
 
Energy 
------ 
4. (C) Senator Lugar also focused on Kazakhstan's energy 
strategy in his discussions.  Prime Minister Masimov told 
Senator Lugar on January 11 that he was having talks on the 
same day with Chevron about the construction of a joint 
Chevron-Kazakhstan pipeline that would send Kazakhstani oil 
westward to the BTC pipeline (see septel).  He added that 
Kazakhstan had considered building the pipeline with the 
Kashagan consortium, but that it would mean too many 
partners in the project.  Masimov also admitted that CPC 
(Caspian Pipeline Consortium) expansion still remains a 
problem, despite the latest agreement in principle between 
President Nazarbayev and President Putin to proceed with 
expansion.  Energy Minister Mynbayev presented a detailed 
account of the status of Kashagan negotiations (reftel), 
reserving heavy criticism for ExxonMobil. Aside from 
Kashagan, said Mynbayev, Kazakhstan's major oil and gas 
projects are proceeding smoothly and Kazakhstan is satified 
with its U.S. partners.  In contrast to Masimov, Mynbayev 
stated that CPC expansion "looks settled." The extra oil 
from expansion would likely be sent to the 
Bourgas-Alexandropolis pipeline. 
 
5. (C) In several meetings, Senator Lugar emphasized the 
importance of Kazakhstan's links to the Baku-Tbilisi-Ceyhan 
pipeline. State Secretary Saudabayev claimed that support 
for the BTC is a political decision, because it is not 
economically justified. (Comment: This is simply not true. 
There is no other route for the additional Kashagan oil 
volumes to get to market.  End comment.)  Energy Minister 
Mynbayev said that Kazakhstan is very interested in 
diversified transportation routes. He noted that President 
Aliyev came to Kazakhstan in August to sign an MOU on 
transportation and that Azerbaijan and Kazakhstan will 
 
examine infrastructure on both sides of the Caspian.  The two 
 countries are developing a government to government 
agreement.  When the big oil comes, said Mynbayev, we believe 
we will have something ready. He added, however, that a trans- 
Caspian pipeline remains a legal problem because of the 
undefined status of Caspian Sea delineation.  Foreign 
Minister 
Tazhin reported that a meeting on regulation of the Caspian 
will be held in October in Baku, with Kazakhstan hopeful for 
a 
positive outcome. Some progress was made during talks in 
Iran, and the Russian position is pragmatic, according to 
Tazhin. 
 
Regional Security and Cooperation 
-----------------
---------------- 
 
6. (C) Senator Lugar thanked his interlocutors for 
Kazakhstan's efforts in Iraq and as a regional leader. 
State Secretary Saudabayev told Senator Lugar that the 
United States is a critical element of Kazakhstan's foreign 
policy.  He characterized Kazakhstan as America's most 
reliable 
and loyal partner of the U.S. in the region despite pressure 
from China and Russia.  Kazakhstan, said Saudabayev, will 
stay 
in Iraq until the end and maintains a similar approach to 
Afghanistan.  Kazakhstan wants regional integration and is 
preparing a serious program for Afghanistan.  Kazakhstan 
also wants to expand its participation in peacekeeping 
operations, added Saudabayev. 
 
7. (C) Tazhin also spoke to Senator Lugar at length about 
Afghanistan. He affirmed that Kazakhstan is trying to be 
more active in Afghanistan, but complained about the 
country's unsuccessful commercial efforts to bid  on the 
Aynak copper mine tender. According to Tazhin, Kazakhstan 
made a favorable offer, but the mine was instead give to 
China.  President Karzai's "excuse" when President Nazarbayev 
raised the issue with him at the SCO summit in Bishkek was 
that Afghanistan was "inexperienced" in such transactions. 
Kazakhstan will stay involved in Afghanistan.  The 2008 
budget 
has funds for an assistance program that includes a hospital, 
schools, and road construction., Kazakhstan also has 
offered to train Afghan police in Kazakhstan. After the 
copper mine, however, Kazakhstan is unsure about economic 
investment, said Tazhin.  Tazhin concluded that he is not 
optimistic about Afghanistan; he sees the situation getting 
worse. 
 
8. (C) Tazhin expressed trepidation about Iran. He said 
that despite the absence of visible evidence of an Iranian 
nuclear program, including the recent U.S. NIE, Kazakhstan is 
still concerned. Kazakhstan has told Iran of its misgivings. 
Regionally, Tazhin said that Kazakhstan is stressing 
"partnership and friendship," not "leadership," which its 
Central Asian neighbors resent.  He described President 
Berdimuhamedov as more open and receptive.  Nevertheless, 
Tazhin called Turkmenistan and Uzbekistan big questions. 
Kazakhstan is looking to invest in Kyrgyzstan and Tajikistan. 
 
Finally, Tazhin thanked the Senator for U.S. support on WTO 
membership and OSCE chairmanship and said that Kazakhstan 
views the OSCE as a serious responsibility, not a public 
relations opportunity. 
 
Prime Minister to the U.S. 
-------------------------- 
 
9.  (SBU) Prime Minister Masimov and Senator Lugar 
discussed the Prime Minister's possible trip to Washington 
in 2008 for the launch of the Public-Private Partnership 
Initiative (PPPI).  Prime Minister Masimov said besides 
PPPI he would like the trip to focus on three issues - 
energy, Nunn-Lugar activities and food processing.  The two 
agreed that if Masimov does come to the U.S. they would 
participate in an event highlighting U.S. - Kazakhstan 
cooperation under the Nunn - Lugar act. 
 
10. (U) Senator Lugar has not cleared this cable. 
ORDWAY

Wikileaks

08ASTANA65, KAZAKHSTAN: CHEVRON FACES THE SQUEEZE AT TENGHIZ

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Reference ID Created Released Classification Origin
08ASTANA65 2008-01-14 10:54 2011-08-30 01:44 CONFIDENTIAL Embassy Astana

VZCZCXYZ0019
PP RUEHWEB

DE RUEHTA #0065/01 0141054
ZNY CCCCC ZZH
P 141054Z JAN 08
FM AMEMBASSY ASTANA
TO RUEHC/SECSTATE WASHDC PRIORITY 1484
INFO RUCNCIS/CIS COLLECTIVE PRIORITY 0362
RUEHAK/AMEMBASSY ANKARA PRIORITY 2119
RUCPDOC/DEPT OF COMMERCE WASHDC PRIORITY
RHEBAAA/DEPT OF ENERGY WASHDC PRIORITY

C O N F I D E N T I A L ASTANA 000065 
 
SIPDIS 
 
SIPDIS 
 
ENERGY FOR EKIMOFF 
COMMERCE FOR HUEPER 
STATE FOR SCA/CEN (M. O'MARA) AND EEB 
 
E.O. 12958: DECL: 01/14/2018 
TAGS: EPET ENRG ECON PREL KZ
SUBJECT: KAZAKHSTAN: CHEVRON FACES THE SQUEEZE AT TENGHIZ 
AND KARACHAGANAK 
 
 
Classified By: AMBASSADOR JOHN ORDWAY FOR REASONS 1.4(B) and (D) 
 
1. (C) Summary:  Chevron executives Guy Hollingsworth and 
James Johnson told the Ambassador on January 11 that 
Chevron is facing "sanctity of contract" issues at its two 
most significant fields in Kazakhstan, Tenghiz and 
Karachaganak.  Earlier in the day, the two had warned Prime 
Minister Masimov that Chevron views as unacceptable new 
fees levied at Karachaganak for permitted (rather than 
actual) emissions and at Tenghiz for sulphur storage. 
Nevertheless, they affirmed that Tenghiz continues to be 
extremely productive (and profitable), and informed the 
Ambassador of plans to build a joint Kazakhstan-Chevron 
pipeline.  End Summary. 
 
2. (C) Guy Hollingsworth, President for Chevron Eurasia, 
Europe and Middle East Exploration and Production, and 
James Johnson, Chevron Eurasia Strategic Business Unit 
Managing Director, told the Ambassador on January 11 that 
Chevron is experiencing "sanctity of contract" problems at 
Tenghiz and Karachaganak.  At Tenghiz, Tenghizchevroil has 
been charged $309 million dollars to store sulfur. 
Tenghizchevroil, they said, has a contractual right to 
store sulfur without cost. 
 
3. (C) The Karachaganak consortium, where Chevron is a non- 
operating partner, is also facing unjustifiable fees, they 
said.  Hollingsworth reported that the consortium developing 
the field has reduced emissions under the operatorship of 
British Gas.  Now, he said, the Kazakhstanis are trying to 
charge the consortium for permitted emissions, rather than 
actual.  The consortium has refused to pay the extra costs. 
The Kazakhstanis have in turn frozen the consortium's bank 
accounts. 
 
4. (C) Prior to speaking with the Ambassador, Johnson and 
Hollingsworth had met with Prime Minister Masimov and told 
him that Chevron is extremely concerned with the situations 
at Karachaganak and Tenghiz.  Chevron can't do business in 
such an enviroment, they warned.  They also told Masimov 
that it is in no one's interest, least of all Kazakhstan's, 
to go to the courts. 
 
5. (C) The $300 million sulfur storage fee, noted 
Hollingsworth, is small pittance for Kazakhstan when 
compared to the country's overall earnings from Tenghiz. 
Hollingsworth estimated that Tenghiz generated $3 billion 
in revenue for Kazakhstan in 2007, to jump to $8 billion by 
the time of first expansion later this year and to $16 
billion 
by final expansion. Hollingsworth and the ambassador agreed 
that most often the extra fees levied on foreign companies at 
places like Tenghiz and Karachaganak are generated by 
regional 
officials, because the money goes to local budgets.  Johnson 
said that actions at Tenghiz indicate that Kazakhstan is 
trying to change the contract for Tenghiz. 
 
6. (C) Hollingsworth informed the Ambassador of plans to 
build a pipeline to deliver Tenghiz crude to the Caspian. 
According to Hollingsworth, Chevron approached Timur 
Kulibayev one year ago with the pipeline idea, motivated by 
increased production at Tenghiz and near-maximized rail 
capacity.  Kulibayev said no on a pipeline, but promised 
to bring Chevron in to the Kazakhstani Caspian Transportation 
System (KCTS).  Chevron, however, has been unable to join 
KCTS. In December, Chevron again raised the pipeline with 
Kulibayev, with Kulibayev this time agreeing.  The pipeline 
will be a joint Chevron-Kazakhstan project, with no other 
partners and Kazakhstan as the builder and operator. Chevron 
will hold 25% and provide some technical assistance during 
the construction phase.  (Comment: In a January 11 meeting 
with Senator Lugar, Prime Minister Masimov confirmed that 
Kazakhstan is in talks with Chevron with about building a 
pipeline. Masimov and the Chevron representatives also 
offered 
a similar message on reports of CPC expansion - both said 
that 
problems still remain. End comment.) 
 
7 (C) Comment: Chevron maintains a very healthy relationship 
with the Government of Kazakhstan. Nevertheless, its problems 
at Karachaganak and Tenghiz demonstrate that even the 
strongest 
ties to Astana do not currently guarantee absolute protection 
 
from arbitrary actions by regional authorities, or by less 
progressive members of the GOK.  Chevron has an enviable 
track 
record of using its long-standing positive relationships, 
coupled by very judicious use of threats to shut down 
production, to resolve its problems.  With the Tenghiz 
revenue 
stream about to explode and the GOK getting 70% of each 
additional dollar in the rise of the price per barrel, there 
should be little stomach in Astana to kill the California 
goose that is laying ever bigger golden eggs for the GOK. 
End Comment. 
ORDWAY

Wikileaks

08ASTANA64, KAZAKHSTAN: PROGRESS ON PFP TRAINING CENTER, BUT

WikiLeaks Link

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Reference ID Created Released Classification Origin
08ASTANA64 2008-01-14 10:19 2011-08-30 01:44 CONFIDENTIAL Embassy Astana

VZCZCXRO1155
PP RUEHBI RUEHCI RUEHLH RUEHPW
DE RUEHTA #0064 0141019
ZNY CCCCC ZZH
P 141019Z JAN 08
FM AMEMBASSY ASTANA
TO RUEHC/SECSTATE WASHDC PRIORITY 1483
INFO RUCNCIS/CIS COLLECTIVE PRIORITY 0361
RUCNCLS/SCA COLLECTIVE PRIORITY
RUEHNO/USMISSION USNATO PRIORITY 2230
RUEKJCS/SECDEF WASHDC PRIORITY 0085

C O N F I D E N T I A L ASTANA 000064 
 
SIPDIS 
 
SIPDIS 
 
DEPT FOR SCA/CEN M. O'MARA 
 
E.O. 12958: DECL: 01/14/2018 
TAGS: KZ NATO PREL
SUBJECT: KAZAKHSTAN: PROGRESS ON PFP TRAINING CENTER, BUT 
CONCERNS REMAIN ON NATO COOPERATION 
 
 
Classified By: Pol/Econ Chief Steven Fagin, Reasons 1.4 (b) and (d) 
 
1. (C) Summary:  Kazakhstan appears poised to move forward 
on opening up a Partnership for Peace (PfP) training 
center, as it had promised to do by the end of 2008. 
However, concerns remain about progress in Kazakhstan's 
cooperation with NATO.  End Summary. 
 
2. (C) Tugay Tuncer, Astana-based NATO liaison officer for 
Central Asia, told polecon chief on January 9 that 
Kazakhstan appears ready to move forward in opening up a 
regional Partnership for Peace (PfP) training center. 
Tuncer had previously informed polecon chief in November 
that the training center effort was largely stalled, as 
Kazakhstan did not take part in the annual PfP training 
center meeting in Monterey in October and had moved the 
proposed site of the training center to a building in 
extremely bad condition. 
 
3. (C) According to Tuncer, Deputy Defense Minister 
Sembinov assured a visiting NATO School assessment team in 
December that Kazakhstan was committed to opening up the 
training center by the end of 2008, as it had originally 
promised, and that Defense Minister Akhmetov firmly 
supported adhering to this timetable.  The assessment team 
and the Defense Ministry came to an agreement on next 
steps.  The Kazakhstanis promised to upgrade the training 
center building, finalize a curriculum by March, and 
expeditiously appoint training center personnel.  NATO in 
turn will send experts to assist each month for the next 
three months, and another assessment team will come to 
Kazakhstan in April to review where things stand. 
 
4. (C) Tuncer explained to polecon chief that while the 
latest news regarding the PfP training center is a positive 
sign, he remains concerned about other developments in 
Kazakhstan's cooperation with NATO.  Tuncer said that 
Kazakhstan intends to subscribe to only 80 Individual 
Partnership Plan (IPP) activities this year, down from 180 
last year.  (Note:  The Kazakhstanis told Tuncer that 180 
was too many given their capabilities.  They only managed 
to actually participate in about 90 activities last year. 
This, they stressed, is the reason they are subscribing to 
fewer this year.  End Note.)  In addition, Tuncer claimed 
that Sembinov had intended to visit NATO headquarters in 
Brussels in late January to reinforce Kazakhstan's 
commitment to NATO, but Akhmetov decided to nix the trip. 
 
5. (C) Tuncer also reminded polecon chief that the Ministry 
of Defense last year reduced the size of its NATO 
cooperation office from ten staffers to just three. 
Minister Akhmetov told NATO Special Representative Robert 
Simmons in November that he had made this staffing cut 
because the quality, not the quantity, of the personnel is 
what matters most.  However, according to Tuncer, the three 
current staffers are weak in comparison with staffers 
previously assigned to the office. 
 
6. (C) Comment:  Tuncer contends that there have been 
increasing problems with Kazakhstan-NATO cooperation since 
Akhmetov replaced Mukhtar Altynbayev as defense minister in 
January 2007.  Akhmetov's actions -- he took, for example, 
eight trips to Moscow during his first eight months as 
minister -- certainly indicate that he has pro-Russian 
inclinations.  That said, we believe the principal problem 
with Akhmetov is that he does not have the breadth of 
professional experience to fully understand the potential 
benefits of enhanced cooperation with western partners, 
including NATO.  In contrast, Deputy Defense Minister 
Sembinov has gradually come to grasp the pluses from 
productive mil-mil ties with the U.S. and West, and has 
been a staunch supporter of both our Humvee and Huey-II 
helicopter programs.  Akhmetov and Sembinov's differing 
views on this issue are reflected in the internal rivalry 
in the Defense Ministry between their respective factions 
-- a rivalry which complicates our ability to work 
effectively with the ministry.  End Comment. 
ORDWAY

Wikileaks

08ASTANA56, HIGH-LEVEL KASHAGAN TALKS SCHEDULED IN ASTANA FOR

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Reference ID Created Released Classification Origin
08ASTANA56 2008-01-11 12:44 2011-08-30 01:44 CONFIDENTIAL Embassy Astana

VZCZCXYZ0000
PP RUEHWEB

DE RUEHTA #0056/01 0111244
ZNY CCCCC ZZH
P 111244Z JAN 08
FM AMEMBASSY ASTANA
TO RUEHC/SECSTATE WASHDC PRIORITY 1473
INFO RUCNCIS/CIS COLLECTIVE PRIORITY 0359
RHEBAAA/DEPT OF ENERGY WASHDC PRIORITY
RUCPDOC/DEPT OF COMMERCE WASHDC PRIORITY

C O N F I D E N T I A L ASTANA 000056 
 
SIPDIS 
 
SIPDIS 
 
SCA/CEN FOR M. O'MARA 
DOE FOR EKIMOFF 
COMMERCE FOR HUEPER 
 
E.O. 12958: DECL: 01/12/2018 
TAGS: EPET ENRG ECON PREL KZ
SUBJECT: HIGH-LEVEL KASHAGAN TALKS SCHEDULED IN ASTANA FOR 
JANUARY 13 
 
 
Classified By: AMBASSADOR ORDWAY FOR REASONS 1.4(B) and (D) 
 
1. (C) Summary:  Further Kashagan negotiations are scheduled 
for January 13 in Astana.  CEOs from all consortium members 
(except Total) expected to participate.  Kashagan was a topic 
of discussion during Senator Richard Lugar's January 10-11 
visit to Astana, with Ministry of Energy and Natural 
Resources Sauat Mynbayev expressing frustration with 
ExxonMobil, KazMunayGas First Vice President Maksat Idenov 
still optimistic on chances for a resolution, and Prime 
Minister Masimov reserved.  ExxonMobil's country 
representative for Kazakhstan told the Ambassador on January 
11 that ExxonMobil does not plan to change its position.  End 
Summary 
 
2. (C) CEOs from Eni, ExxonMobil, ConocoPhillips, Impex, and 
Shell are expected in Astana on January 13 for the latest 
round of Kashagan negotiations. (Total will be represented by 
chairman.)  According to ExxonMobil Kazakhstan's Government 
Relations and Public Affairs Director Patricia Graham, each 
CEO will meet separately with Ministry of Energy and Natural 
Resources Sauat Mynbayev before a group meeting with Prime 
Minister Karim Masimov. 
 
3. (C) Kashagan was a subject of conversation during Senator 
Richard Lugar's January 9-11 trip to Kazakhstan (see septel 
for a more detailed description of the Senator's meetings). 
Prime Minister Masimov noted that ExxonMobil was the 
remaining obstacle but otherwise did not comment on the 
prospects of a negotiated settlement.  Energy Minister 
Mynbayev told the Senator that Kazakhstan "has exhausted all 
of its flexibility on Kashagan." January 13-14 will be the 
final negotiations, he said, and then Kazakhstan will decide 
whether to continue to work with the consortium (Comment: 
Mynbayev gave no hint of contemplated next steps if the next 
round of negotiations fail. Local media on January 11 quoted 
an unnamed source "close to the talks" who said that 
Kazakhstan is considering termination of the Production 
Sharing Agreement (PSA)).  Mynbayev placed the blame on 
ExxonMobil, saying that ExxonMobil and Kazakhstan have not 
been able to agree upon the value of an increased stake for 
KazMunayGas (KMG).  Aside from the dispute with ExxonMobil, 
all sides are in agreement on all issues, claimed Mynbayev. 
 
4. (C)  Maksat Idenov, KMG First Vice-President and Kashagan 
lead negotiator, told Senator Lugar that he is still 
optimistic on chances for a resolution.  Idenov did not spare 
the consortium of criticism, calling it dysfunctional and 
describing frequent disagreements among the parties.  He 
explained to the Senator in some detail the reforms he 
believes are needed within the consortium and which he 
claimed are largely agreed upon.  Like Mynbayev, Idenov was 
critical of ExxonMobil's approach to calculating the 
fair-market value of KMG's increased stake.  Nevertheless, he 
said that Kazakhstan wants to keep the consortium together 
and could not see the prospect of "excluding" any current 
consortium members.  In response to a question from a 
delegation member, Idenov stated that Kazakhstan has never 
threatened to apply the sub-soil use law against the 
consortium. He also noted that he has approved the next 
operating budget for Kashagan. 
 
5.(C) Graham told the Ambassador on January 11 that 
ExxonMobil will not change its position.  ExxonMobil is a 
world-wide operation, she said, and cannot afford to create a 
precedent in Kazakhstan that will affect it elsewhere.  She 
said that progress has been made on other issues, but not on 
the question of establishing the fair market value of an 
increased ownership share for KMG. Graham indicated that 
ExxonMobil does not have any new ideas to offer and she 
expects "tough negotiations." 
 
6. (C) Comment: The sides in the Kashagan dispute have made 
some progress, and Kazakhstan's decision to approve the next 
operating budget is positive.  Nevertheless, with Kazakhstan 
and ExxonMobil at loggerheads, we do not expect this 
weekend's negotiations to yield a final result, and we are 
not yet ready to give credence to rumors of breaking the PSA 
as anything more than another bargaining tactic. Ultimately, 
as Idenov confirmed, none of the consortium members are 
willing to sell any of their interests (except to grant KMG a 
larger share), or to walk away from an asset that has 
considerable impact on each company's proven reserves.  The 
GOK needs a capable operator, and breaking the current 
contract would create a situation that would further delay 
the project, raise costs, and create a grave risk to its 
 
viability, particularly if ExxonMobil or any other member 
took the matter to the courts or arbitration. End Comment 
 
7. (U) Senator Lugar has not cleared this cable. 
 
ORDWAY

Wikileaks

08ASTANA54,

WikiLeaks Link

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Reference ID Created Released Classification Origin
08ASTANA54 2008-01-11 12:32 2011-08-30 01:44 UNCLASSIFIED Embassy Astana

VZCZCXRO9806
RR RUEHAST
DE RUEHTA #0054/01 0111232
ZNR UUUUU ZZH
R 111232Z JAN 08
FM AMEMBASSY ASTANA
TO RUEHC/SECSTATE WASHDC 1470
RHFJUSC/USCUSTOMS WASHDC
RHEBAAA/DEPT OF ENERGY WASHDC
RUCPDOC/DEPT OF COMMERCE WASHDC
RULSJGA/COMDT COGARD WASHINGTON DC
RUEKJCS/SECDEF WASHDC 0082
RHEBAAA/USDOE WASHDC
RUETIAA/NSA WASHDC
RUEKJCS/JCS WASHDC 0010
RUCQAAA/USCINCCENT MACDILL AFB FL
RUEHRL/AMEMBASSY BERLIN 0461
RUEHEK/AMEMBASSY BISHKEK 8225
RUEHNT/AMEMBASSY TASHKENT 8109
RUEHKB/AMEMBASSY BAKU 0034
RUEHDBU/AMEMBASSY DUSHANBE 2318
RUEHAH/AMEMBASSY ASHGABAT 7283
RUEHAST/USOFFICE ALMATY 0124

UNCLAS SECTION 01 OF 03 ASTANA 000054 
 
SIPDIS 
 
SIPDIS 
 
DEPT FOR ISN/ECC YWONG, ACHURCH, JHARTSHORN, SROBINSON 
DEPT FOR ISN/ECC-AMT LSPRINGER 
DEPT FOR EUR/ACE DFISCHER 
DEPT FOR SCA/RA JSPILSBURY 
DEPT FOR SCA/CEN MO'MARA 
CBP/INA FOR KCHAISSON AND RWATT USDOE/NNSA CWALKER, TPERRY AND EDESCHLER DOC FOR DCREED USCG FOR SHABETIMICHAEL AMEMBASSY BERLIN FOR CUSTOMS ATTACHE AMEMBASSY TASHKENT, BISHKEK, BAKU, DUSHANBE AND ASHGABAT FOR EXBS ADVISORS E.O. 12958: N/A TAGS: ETTC MNUC PARM PREL KSTC KNNP KZ

1.The government of Norway has agreed to provide $5 million to fund additional radiation detection equipment for improved Kazakhstan border security. This will dramatically expand the number of border posts with detection ability, and is the largest contribution to date to the Nuclear Smuggling Outreach Initiative (NSOI). Representatives from the Department of Energy are meeting their Norwegian counterparts to negotiate a Memorandum of Understanding. This contribution will be integrated into the Department of Energy Second Line of Defense (DOE/SLD) program plans for Kazakhstan.

II. COMPLETED ACTIONS FOR THE REPORTING PERIOD

A. SITE ASSESSMENTS AND MEETINGS CONDUCTED

1.On December 8, 2007, the EXBS Advisor met with Mr. Richard Talley, Program Manager for the Caucasus Region and Central Asia, National Nuclear Security Administration, and Mr. Chuck Willingham, Staff Engineer, Pacific Northwest National Laboratory, on the International Nonproliferation Export Control Program's (INECP) country plan for Kazakhstan. The EXBS Advisor was briefed on INECP efforts in Kazakhstan to date and was provided valuable insight into INECP efforts in the licensing area aimed at adding additional organizations and institutes to the computerized license system, implementing security upgrades, and making improvements to the computer network and communications infrastructure. Additional discussions centered on proposed training for Customs and Border Guards during 2008 and the need for a comprehensive Kazakhstani response protocol.

B. TRAINING DURING THE REPORTING PERIOD

1. A Commodity Identification Training (CIT) course for Customs Control Committee personnel was conducted the week of December 3, 2007, in Borovoe, Kazakhstan. This was the fifth CIT seminar in Kazakhstan and the second one that did not require U.S. instructors to present any training materials. This training was monitored by Mr. Richard Talley, Program Manager for the Caucasus Region and Central Asia for the Department of Energy/National Nuclear Security Administration's (DOE/NNSA) International Nonproliferation Export Control Program (INECP), and Mr. Chuck Willingham, Staff Engineer, Pacific Northwest National Laboratory.

2. From December 3 - 7, 2007, EXBS Program Manager Gulnara Abildaeva and EXBS Program Assistant Oxana Limareva traveled to Frankfurt, Germany, to participate in the Foreign Service Institute's training class on Managing Foreign Assistance Awards Overseas. This course prepares employees to link assistance programs with post-specific strategic planning goals and objectives and to develop a post-specific assistance awards program from concept and design, through implementation and management, to evaluation of the results.

C. EQUIPMENT DELIVERED DURING THE REPORTING PERIOD

1.On December 4, 2007, EXBS Program Manager Gulnara Abildaeva delivered to Mr. Jerry Guilbert, Special Projects Program Manager ISN/ECC, the acceptance documents signed by Major General Hussain Berkaliyev, First Deputy Director, National Security Committee, Border Guard Service, for $970,326 worth of EXBS donated equipment consisting of 4 portable shelter complexes and 11 URAL trucks ASTANA 00000054 002 OF 003 delivered under Task Order 79.

D. IMMINENT TRAINING OR EQUIPMENT STATUS UPDATE

1.The EXBS team has scheduled a meeting on January 15, 2008, with senior representatives from the Border Guard Services of the National Security Committee and the Customs Control Committee of the Ministry of Finance of the Republic of Kazakhstan. The goal of this meeting is to determine if EXBS donated equipment (such as Radiation Isotope Identification Devices, enforcement tool kits, modular shelters, vehicles, mobile X-ray vans, and stationary pallet X-ray machines) is meeting the specific needs of the Customs and Border Guard Services of Kazakhstan and to address future implementation, training, and delivery issues. During the meeting in Astana, the EXBS team will deliver five CT30 Kits, and two Ludlum Survey Meters.

2.The EXBS team will attend a Border Security Donor Coordination meeting in Astana on January 23, 2008.

3.The EXBS Advisor will participate in an International Counterproliferation Program (ICP) course, "WMD International Investigations", taught in Astana, from January 28 - February 1, 2008. This course is designed for approximately 30-35 criminal investigators to enhance specialized investigative skills in transnational investigations of Weapons of Mass Destruction incidents.

4. The Department of Energy Second Line of Defense Program is continuing its project to
install portal monitors at border sites. The EXBS team will accompany Ms. Laurel Cotton, the Project Coordinator for the U.S. Department of Energy's Second Line of Defense (SLD) Program, to a meeting in Astana with Kazakhstani Customs officials on February 4, 2008, to discuss a broad range of matters concerning the SLD program. The SLD equipment for Phase One installation is scheduled to arrive in Kazakhstan from Russia between January 9 and 14, 2008. EXBS will send a diplomatic note to the Ministry of Foreign Affairs requesting access to the requested sites for U.S. technical specialists so that they can begin the installation of the portal monitors and related equipment during February 2008.

5.Task Order 79 Donations. Delivery of the original water tanks for the four modular shelters donated to the Border Guards was delayed due to difficulties encountered in the Customs clearance process created by a change in the Kazakhstani law. The official letter from the Vice Minister, Ministry of Economy and Budget Planning, approving the release of the water tanks from the Almaty airport warehouse without charging the warehouse storage fees was passed on to the Customs Control Committee on November 19. However, the warehouse proprietor has thus far refused to release the water tanks without payment of the storage fees. The Border Guard Service is looking into gaining the release of these water tanks from the warehouse.

E. SIGNIFICANT DEVELOPMENTS IN EXPORT CONTROLS, NONPROLIFERATION, OR RELATED BORDER SECURITY

1.None. F. CASPIAN SECURITY INFORMATION ASTANA 00000054 003 OF 003

1. The Kazakhstani Marine Border Guards (MBG) have expressed a desire to attend the Safe Boat Operations Course (CG 33) during the June/July time frame as offered by Lt. Michael Fisher, EXBS Caspian Region Maritime Advisor, Baku, in a letter to MBG Major General Berkaliyev. III. RED FLAG ISSUES.

1.None ORDWAY

Wikileaks

08ASTANA50, KAZAKHSTAN: PENTECOSTAL CHURCH, CHRISTIAN

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Reference ID Created Released Classification Origin
08ASTANA50 2008-01-11 11:20 2011-08-30 01:44 CONFIDENTIAL Embassy Astana

VZCZCXRO9762
RR RUEHBI RUEHCI RUEHLH RUEHPW
DE RUEHTA #0050/01 0111120
ZNY CCCCC ZZH
R 111120Z JAN 08
FM AMEMBASSY ASTANA
TO RUEHC/SECSTATE WASHDC 1467
INFO RUCNCIS/CIS COLLECTIVE 0356
RUCNCLS/SCA COLLECTIVE
RUEHVEN/USMISSION USOSCE 1855

C O N F I D E N T I A L SECTION 01 OF 03 ASTANA 000050 
 
SIPDIS 
 
SIPDIS 
 
STATE FOR SCA/CEN M O'MARA 
 
E.O. 12958: DECL: 01/11/2018 
TAGS: KDEM KZ PGOV PHUM PREL
SUBJECT: KAZAKHSTAN:  PENTECOSTAL CHURCH, CHRISTIAN 
SATELLITE TELEVISION FLOURISH DESPITE CHALLENGING 
ENVIRONMENT 
 
REF: A. A) 07 ASTANA 654 
 
     B. B) 07 ASTANA 741 
     C. C) 07 ASTANA 1371 
     D. D) 07 ASTANA 2718 
 
Classified By: Ambassador John Ordway; reasons 1.5(b) and (d) 
 
1. (C)  Summary: Kazakhstan is home to the world's largest 
Russian language Christian satellite television network and a 
steadily growing, openly evangelical Pentecostal church, 
surprising facts considering the negative attention the 
country sometimes receives for its treatment of groups that 
are not part of the Muslim,  Russian Orthodox, Catholic, or 
Jewish mainstream.  Though the religious freedom landscape is 
far from perfect, some minority religious groups are able to 
operate very effectively.  End summary. 
 
A MEGA-CHURCH IN ALMATY 
 
2. (C)  Poloff met on December 14, 2007 with Maksim Maksimov, 
founding pastor of the New Life (Pentecostal) Church in 
Almaty and head of a worldwide satellite television ministry 
called New Life Channel ("CNL").  The meeting took place in 
Maksimov's office in the main New Life ministry center in 
Almaty, a multi-building complex including a church, offices, 
classrooms, broadcast production facilities, cafeteria, and 
prayer center. The complex was swarming with dozens of 
staffers and volunteers, and in many respects had the look 
and feel of an American mega-church. 
 
3. (C) Maksimov, who is as much an entrepreneur as he is a 
pastor, founded the first New Life Church in Kazakhstan in 
September 1990. He reports that the denomination is 
registered nationally, and there are approximately 100 New 
Life churches throughout Kazakhstan, with a total of 
8,000-10,000 regular attendees.  In Almaty alone, there are 
seven New Life churches, including a Kazakh-language and a 
Uighur-language church. In addition to traditional church 
activities, the ministry center in Almaty runs a soup kitchen 
for homeless and poor people, provides health care to the 
indigent, trains pastors and missionaries, and organizes 
ministries for deaf people and prisoners. Maksimov said that 
pastors and missionaries trained in Almaty have helped 
establish churches throughout Kazakhstan and other countries 
in the region, and that the church regularly sends 
missionaries abroad, including to China. Maksimov also runs a 
website popular with church members in Kazakhstan; among 
other things, he writes a question and an 
swer column addressing spiritual questions from church 
members (www.maximmaximov.org). 
 
BROADCASTING TO A WORLDWIDE AUDIENCE 
 
4. (C)  Maksimov was most energized when discussing CNL 
(www.CNL.org), which began broadcasting for a few hours a day 
on the local Almaty cable network in December 2000.  In July 
2002, he secured the first satellite contract for the 
network, and has steadily expanded its reach since then. 
Today, CNL is broadcast through three satellites which 
together reach virtually the entire world, with the exception 
of South America. CNL is also shown on over 400 cable 
networks worldwide, including several in Kazakhstan. 
According to Maksimov, it is the largest Russian-language 
Christian television network in the world.  The network 
features some original programming, including broadcasts of 
Maksimov's Sunday morning services, as well as other 
evangelical programming from throughout the world, all 
translated into Russian by the network's in-house translation 
staff.  The ministry center features a separate production 
facility for the network, and is crammed full of young, savvy 
workers pouring over broadcast schedules, d 
esigning graphics, and recording Russian-language 
translations of the programming they have acquired from 
abroad. Maksimov reports that most of their workers are 
trained in-house, and that they are a largely self-sufficient 
operation. The ministry center also offers television 
broadcasting training to interested students from throughout 
Kazakhstan, and actively encourages local churches to use 
television as part of their ministry. 
 
5. (C) CNL does not aQ&N,588

Wikileaks

08ASTANA41, KAZAKHSTAN: ANTI-NARCOTICS LEGISLATION WOULD INCREASE

WikiLeaks Link

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Reference ID Created Released Classification Origin
08ASTANA41 2008-01-09 12:08 2011-08-30 01:44 UNCLASSIFIED Embassy Astana

VZCZCXRO7759
RR RUEHAST RUEHBI RUEHCI RUEHLH RUEHPW
DE RUEHTA #0041 0091208
ZNR UUUUU ZZH
R 091208Z JAN 08
FM AMEMBASSY ASTANA
TO RUEHC/SECSTATE WASHDC 1461
INFO RUEHAST/USOFFICE ALMATY 0119
RUCNCLS/SCA COLLECTIVE

UNCLAS ASTANA 000041 
 
SIPDIS 
 
STATE FOR INL/AAE (BUHLER AND BALABANIAN), INL/C, SCA/CEN (O'MARA) 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: SNAR SOCI KCRM KZ
SUBJECT: KAZAKHSTAN: ANTI-NARCOTICS LEGISLATION WOULD INCREASE 
CRIMINAL PENALTIES 
 
 
1. The media reported on January 9 that the Mazhilis (the lower 
chamber of Parliament) has approved a bill to amend the Criminal and 
Administrative Codes to increase penalties for drug-related crimes 
up to life imprisonment. 
 
2. Kalmukhanbet Kassymov, Vice Minister of Internal Affairs (MVD), 
said that life imprisonment will be applied in cases of 1) sales of 
drugs in educational institutions and to minors; 2) sales of large 
quantities of drugs, especially when sold by organized criminal 
groups; and 3) sales resulting in death.  The bill includes 
sanctions against "entertainment organizations" and allows for 
temporary suspension or closure of such facilities if drugs are 
found. 
 
3.  At a meeting with Mazhilis deputies, Vice Minister Kassymov 
contended that contraband and narco-trafficking is growing in 
Kazakhstan and that criminal penalties must be toughened in 
response.  Maratkali Nukenov, Chairman of the Committee on Combating 
Drugs of the MVD, said in a press interview on January 5 that China 
has been the most country successful in countering drugs, because of 
its tough penalties for drug-related crimes, including the death 
penalty,  as well as its well-developed drug demand reduction and 
rehabilitation programs.  The Kazakhstani MVD, Nukenov explained, is 
incorporating the positive examples of its Chinese counterparts in 
its work. 
 
ORDWAY

Wikileaks

08ASTANA40, CPC PIPELINE EXPANSION MOVES FORWARD, BUT

WikiLeaks Link

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Reference ID Created Released Classification Origin
08ASTANA40 2008-01-09 11:59 2011-08-30 01:44 CONFIDENTIAL Embassy Astana

VZCZCXYZ0020
PP RUEHWEB

DE RUEHTA #0040/01 0091159
ZNY CCCCC ZZH
P 091159Z JAN 08
FM AMEMBASSY ASTANA
TO RUEHC/SECSTATE WASHDC PRIORITY 1459
INFO RUCNCIS/CIS COLLECTIVE PRIORITY 0354
RUEHAK/AMEMBASSY ANKARA PRIORITY 2117
RUEHBJ/AMEMBASSY BEIJING PRIORITY 0031
RHEBAAA/DEPT OF ENERGY WASHDC PRIORITY
RUCPDOC/DEPT OF COMMERCE WASHDC PRIORITY

C O N F I D E N T I A L ASTANA 000040 
 
SIPDIS 
 
SIPDIS 
 
STATE FOR SCA/CEN, EEB 
ENERGY FOR EKIMOFF 
COMMERCE FOR HUEPER 
 
E.O. 12958: DECL: 01/04/2018 
TAGS: EPET ENRG ECON PREL KZ
SUBJECT: CPC PIPELINE EXPANSION MOVES FORWARD, BUT 
QUESTIONS REMAIN 
 
 
Classified By: AMBASSADOR ORDWAY FOR REASONS 1.4(B) and (D) 
 
1. Summary: (C) During his December 20 visit to Moscow, 
President Nazarbayev announced that Russia and Kazakhstan 
have agreed in principle to increase the capacity of the 
Caspian Pipeline Consortium (CPC) pipeline.  Arman Darbayev, 
KazMunayGas Executive Director for Oil Transportation, later 
told Poloff that he believes that CPC expansion will occur by 
2011.  Darbayev said that some questions remain regarding 
Kazakhstan's role in the Bourgas - Alexandroupolis pipeline. 
Moreover, even with its expansion the CPC will only meet a 
fraction of Kazakhstan's oil transportation needs by 2015. 
End Summary. 
 
2. (U) After his December 20 meeting with President Putin in 
Moscow, President Nazarbayev announced that Russia and 
Kazakhstan agreed in principle to expand the Caspian Pipeline 
Consortium (CPC) pipeline.  In his public statement, 
Nazarbayev stated that the two countries will increase the 
CPC's capacity to 1.34 million barrels per day from 600,000 
b/d.  Nazarbayev also announced that Kazakhstan would be 
involved in the Bourgas-Alexandropolis pipeline project, 
without giving details, and that oil exports via the 
Atyrau-Samara pipeline will be increased to 500,000 b/d from 
300,000 b/d. 
 
3. (C) Arman Darbayev, KazMunayGas Executive Director for Oil 
Transportation, told Poloff on December 27 that significant 
progress has been made on the four issues hampering CPC 
expansion - increased tariffs, lower interest on the loans 
extended by shareholders to CPC, a debt restructuring, and 
the provision of extra volumes from CPC to the Bourgas - 
Alexandopolis pipeline (BA).  Darbayev believes that CPC 
pipeline expansion will occur by 2011. 
 
4. (C) Darbayev addressed Kazakhstan's involvement in the 
Bourgas - Alexandropolis (BA) pipeline.  Kazakhstan has 
always viewed BA participation and CPC expansion as 
"simultaneous," and Russia "has generally agreed with this." 
Nevertheless, Kazakhstan is "a little confused" by BA, he 
said.  According to Darbayev, Kazakhstan had expected to 
approach Greece and Bulgaria with Russia to discuss the 
pipeline.  Instead, Kazakhstan was left out of the process. 
Darbayev sees "many commercial issues" with BA, particularly 
because most of the oil will initially come from the Tenghiz 
field.  What will Chevron do if they do not have a share of 
BA?, he asked. The TenghizChevroil consortium developing the 
Tenghiz field will not make any guarantees to BA if they are 
only shippers, he said. 
 
5. (C)  Poloff asked Darbayev if Kazakhstan tied CPC 
expansion to its participation in the new Caspian gas 
pipeline from Turkmenistan to Russia.  Darbayev said that no 
connection was made, calling the new gas pipeline "a 
political issue." He added that he had no direct role in the 
gas pipeline talks but that he has examined the agreement, 
which he said "resembles a CIS document."  Asked to explain, 
he said that the document is short on details and may create 
problems in the future. 
 
6 (C) Darbayev also offered a broad overview of Kazakhstan's 
future oil transportation needs.  According to Darbayev, 
Kazakhstan expects to produce 130-150 million tons of oil by 
2015.  They expect to ship 50 million tons via CPC, 15-20 to 
China, 15-20 via Atyrau - Samara, and 50-80 million tons via 
the KCTS (Kazakhstani Caspian Transportation System).  Poloff 
asked Darbayev what Kazakhstan will do if any of the 
pipelines do not meet their envisioned capacity.  Darbayev 
replied that another CPC might be an option, and that a new 
pipeline from Baku is also needed. 
 
7. (C) Comment: Kazakhstan appears to finally have forward 
momentum on CPC pipeline expansion, a key priority for the 
country.  Nevertheless, if current 2015 estimates hold true, 
only approximately 1/3 of Kazakhstan's oil exports will be 
transported via the CPC.  Therefore, while Kazakhstan 
publicly trumpets CPC expansion, private statements by 
President Nazarbayev (he recently told both the Ambassador 
and President Gul of Turkey that Kazakhstan is interested in 
a Trans-Caspian pipeline, while not specifying whether for 
oil or gas) and planned or completed infrastructure 
acquisitions in Romania, Turkey, and Georgia indicate that 
Kazakhstan's oil transit strategy maintains a significant 
cross-Caspian focus.  End Comment. 
 
ORDWAY

Wikileaks

08ASTANA16, STIRRED, NOT SHAKEN: KAZAKHSTAN MANAGES THE LIQUIDITY

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Reference ID Created Released Classification Origin
08ASTANA16 2008-01-04 02:45 2011-08-30 01:44 UNCLASSIFIED//FOR OFFICIAL USE ONLY Embassy Astana

VZCZCXRO4378
RR RUEHLN RUEHVK RUEHYG
DE RUEHTA #0016/01 0040245
ZNR UUUUU ZZH
R 040245Z JAN 08
FM AMEMBASSY ASTANA
TO RUEHC/SECSTATE WASHDC 1444
INFO RUCPDOC/DEPT OF COMMERCE WASHDC
RUCNCIS/CIS COLLECTIVE 0351
RUEHAST/USOFFICE ALMATY 0112

UNCLAS SECTION 01 OF 03 ASTANA 000016 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
DEPT FOR SCA/CEN (O'MARA) 
 
E.O. 12958: N/A 
TAGS: ECON PGOV EFIN EINV KTDB KZ
 
SUBJECT:  STIRRED, NOT SHAKEN: KAZAKHSTAN MANAGES THE LIQUIDITY 
CRUNCH 
 
Ref:  (A) 07 Astana 3025  (B) 07 Astana 3185  (C) 06 Astana 1512 
 
ASTANA 00000016  001.2 OF 003 
 
 
1. (SBU) Summary.  Top officials at the National Bank of Kazakhstan 
and the Financial Supervision Agency, as well as Kazakhstan's 
leading bankers see a very low risk of a default by a major 
Kazakhstani bank.  The difficulties for the banking sector and the 
economy at large resulting from the global financial crisis are 
being alleviated by the government's $4 billion assistance package, 
which may eventually be increased further.  Policymakers and 
observers foresee only a moderate slowdown for the economy in 2008. 
On the other hand, policymakers appear somewhat frustrated in the 
face of the recent inflation surge.  Still, they remain optimistic 
about the long-term prospects for the Kazakhstani economy, as long 
as there is no collapse of commodity prices.  End summary. 
 
Too Big to Fail:  Major Banks Remain Confident 
--------------------------------------------- - 
 
2. (SBU) Kazakhstan's banking sector continues to grapple with the 
sudden dry-up of global credit on which it had been heavily relying 
prior to July-August 2007 (ref A, B).  The well has not run entirely 
dry: Jurgen Rigterink, Chairman of the Board of ABN Amro, told 
visiting Treasury Advisor Thomas Lanier on November 28 that lines of 
credit are still available to "some" Kazakhstani banks, albeit at 
higher interest rates.  However, Rigterink noted, western industry 
analysts tend to lump Kazakhstani banks together, and the recent 
decision of the Development Bank of Kazakhstan (DBK) to pull its 
debt offering sent a bad signal to the market.  (Note: A DBK 
official confirmed to Econoff that the Bank decided to cancel its 
Eurobond offering due to unfavorable market conditions.  End note.) 
Still, Rigterink considers it "unlikely" that the Kazakhstani 
Government (GOK) would allow a top-five bank to fail.  "There may be 
a forced sale, a takeover," Rigterink mused, "I wouldn't want to be 
an equity holder, but I would have no problem having a deposit [in 
one of these banks]."  Similarly, Dauren Karabayev, Deputy CEO of 
Halyk Bank, told Advisor Lanier on November 30 that the chances of a 
failure by a top-six bank are "very small." 
 
3. (SBU) The operational assumption of the Kazakhstani banking 
sector is that the country's big banks are "too big to fail," and 
the other banks do not matter.  Yelena Bakhmutova, Deputy Chairman 
of the Financial Supervision Agency (FSA) told Advisor Lanier on 
November 29 that in some circumstances - such as when a bank is 
struggling and does not present "systemic risks" - it should be 
permitted to go bankrupt.  Bank deposits, she noted, are guaranteed 
up to KZT 700,000 (approx. $5,800), and "the system has already 
worked twice in the past.  (Note: Baimukhanova was apparently 
referring to the failures of two regional banks, including that of 
Valut Tranzit in 2006, ref C.  End note.)  If a top-three bank 
failed, she continued, "that would be a problem."  However, she 
stated, "these banks do present systemic risks," making it clear 
that the government is committed to ensuring that no top Kazakhstani 
bank fails. 
 
4. (SBU) There appears to be a consensus among Kazakhstani bankers 
that the biggest risk to the country's banking sector is the quality 
of the credit portfolio.  Several bankers who met with Advisor 
Lanier in late November and visiting Federal Reserve Bank of New 
York (FRBNY) officials Hunter Clark and David Wright on December 
10-11 singled out Alliance Bank as probably the most vulnerable of 
large Kazakhstani banks.  Dauren Kereibayev, Alliance CEO, described 
his bank to Advisor Lanier as the leader in consumer finance, 
specializing in "very liquid" loans with an average size of $2,000 
and average term of two years.  Kereibayev stated that these loans 
pose much lower risk than mortgages, to which Alliance has "the 
lowest proportionate exposure" of all its competitors.  However, 
Asylbek Aydarkulov, Director of ATF Bank's International Department, 
told visiting FRBNY officials that there is "lots of fraud" with 
Alliance's "express-loan" program.  The consumer credit rating 
system, he explained, is still woefully underdeveloped. 
Furthermore, he added, consumer lending is a difficult business in a 
culture where it is common to borrow several hundred dollars from 
family or friends. 
 
5. (SBU) While several bankers said that the first seven to nine 
months of 2008 may be challenging, they remain generally upbeat 
about prospects for growth.  Bank Turan Alem's (BTA's) CEO Dauren 
Kereibayev told Advisor Lanier that "the most pessimistic scenario" 
for 2008 is 10 percent asset growth.  Magzhan Auezov, Managing 
Director of KazKommertsBank, predicted 5-10 percent, at least during 
the first half of 2008.  BTA's Managing Director Georgiy Iosifyan 
told the visiting FRBNY officials that there is still $7 billion 
circulating in the Kazakhstani economy
outside the banking sector 
("under the mattresses").  There is thus potential, Iosifyan 
concluded, to attract more deposits as confidence in the banking 
sector grows. 
 
ASTANA 00000016  002.2 OF 003 
 
 
 
6. (SBU) Several bankers noted that there is growing interest, 
particularly from the Middle East, in Kazakhstan's banks.  FSA's 
Bakhmutova noted to Advisor Lanier that the GOK has abolished a 50 
percent limit on foreign ownership of Kazakhstani banks.  She also 
remarked that there are currently 35 banks in Kazakhstan, "too many 
in my opinion."  She elaborated that the optimal number would be 20, 
and that the FSA is considering measures to encourage consolidation. 
  However, due to the credit crunch, the bankers see as unlikely a 
near-term foreign acquisition of a major Kazakhstani bank akin to 
the June 2007 (pre-credit crunch) purchase of Kazakhstan's ATF Bank 
by Austria's Unicredit.  On the other hand, BTA's Iosifyan stated 
that BTA is currently trying to sell to a foreign investor its 
subsidiary Temir Bank, a large retail bank, the value of which 
Iosifyan estimates at $1.5-2.0 billion.  A lower-ranking BTA 
executive recently told Econoff that BTA's efforts to sell Temir are 
driven by necessity.  BTA, he said, has been laying off staff and 
needs an influx of funds to service its debts. 
 
The $4 Billion Package -- Government Proactive 
--------------------------------------------- - 
 
7. (SBU) The bankers, in general, appear to be quite supportive of 
the proactive role taken by the government in helping Kazakhstan 
navigate through the current financial turmoil.  The sudden global 
liquidity dry-up has presented a shock not only to the Kazakhstani 
banking system but to the country's economy as a whole (ref A, B). 
The GOK's widely announced $4 billion assistance package is meant to 
address both.  The money, $1 billion in 2007 and $3 billion in 2008, 
is to be disbursed via Kazyna's Development Bank of Kazakhstan (DBK) 
and injected into the banking system as deposits in the accounts of 
participating commercial banks.  The banks can use the funds for 
issuing credit but only in accordance with specific directives.  Of 
the $1 billion disbursed in 2007, $400 million is earmarked for 
residential housing (for completion of ongoing construction projects 
in Astana by financing either construction companies or mortgage 
holders), $400 million for SMEs, and $200 million for innovative 
industrial projects.  The breakdown for the 2008 package does not 
appear to have yet been decided. 
 
8. (SBU) BTA's Iosifyan told the FRBNY officials that the government 
has hinted of its willingness to increase the 2008 assistance 
package by another $3 billion, bringing its total value to $7 
billion.  National Bank of Kazakhstan (NBK) Chairman Anvar Saidenov 
explicitly stated to the FRBNY officials that the government would 
not tap into the National Oil Fund for the money, but rather that 
the funds will come from the national budget, through shifting 
resources from "other budgetary activities." 
 
9. (SBU) The package is an outcome of close collaboration between 
the government and the leading banks.  As one of the bankers mused, 
"a key difference between Kazakhstan and Russia is that here the 
government can get together with the top banks."  The government's 
assistance to the banks comes with strings.  According to Alliance's 
Kereibayev, the participating bankers promised not to finance new 
construction but to complete ongoing projects, and to borrow abroad 
only to refinance existing debt.  Participating banks are also 
limited in their ability to engage in lending activities abroad. 
 
Economic Outlook Still Robust 
----------------------------- 
 
10. (SBU) Some economic worries clearly remain.  While FSA's 
Baimukhanova emphasized to Advisor Lanier that Kazakhstani banks are 
fully capable of paying out $12 billion next year to service their 
external debts, she noted that this obligation "can affect the 
economy."  Still, most bankers, as well as FSA's Baimukhanova and 
NBK's Sartbayev, foresee only a moderate economic slowdown, 
expecting the 2008 growth rate to be in the range of 5-8 percent. 
Baimukhanova, however, stated that the economic risks may increase 
in 3-5 years, because the banks' borrowings - which started only in 
2002 - will then result in a high redemption burden.  Baimukhanova 
opined that if that period coincides with a fall in commodity 
prices, the Kazakhstani economy will face problems. 
 
11. (SBU) Short-term challenges also remain.  In November, 
year-on-year inflation hit 17.5 percent, propelled by soaring food 
prices (up nearly 25 percent year-on-year).  This remains a 
politically sensitive issue.  According to one private sector 
analyst, on average nearly 40 percent of household expenditures are 
spent on food.  Speaking to Advisor Lanier, NBK's Deputy Chairman 
Sartbayev implied that the NBK faces limited options in controlling 
inflation.  In Kazakhstan, Sartbayev explained, lack of liquidity 
actually contributes to inflation via higher costs for importers 
financing their goods purchases.   Thus, raising rates may actually 
fuel inflationary pressures.  What does help against inflation, he 
 
ASTANA 00000016  003.2 OF 003 
 
 
continued, is a steady exchange rate.  On this score, NBK Chairman 
Saidenov told the FRBNY officials that the NBK has no particular 
target for the exchange rate.  (Comment: This remark is somewhat 
contradicted by the tenge's remarkable failure to venture outside 
the 120-121 per dollar range over several months.  End comment.) 
Saidenov stated that the central bank's policy is "to allow 
fluctuations both ways but to moderate them."  Due to balance of 
payment pressures (ref B), Saidenov expects some pressure on the 
tenge in 2008.  On this, he stated, "We are willing to strike a 
balance between spending a couple of billion dollars from reserves 
to support the tenge on one hand, and allowing moderate depreciation 
on the other." 
 
Comment 
------- 
 
12. (SBU) Nearing the six-month mark following the advent of the 
liquidity crunch, the Kazakhstani economy and the banking sector 
appear to be taking the challenges in stride.  Most of the impact, 
so far, has been on the office and residential construction sectors 
in Almaty.  Economic growth forecasts have been cut to some extent, 
but the government's commitment to supporting the financial sector 
is clearly providing important reassurance.  At the same time, the 
comments by National Bank Deputy Chairman Sartbayev on inflation 
demonstrate policymakers' frustration with the inflation surge, 
which cannot be controlled with monetary contraction and is largely 
fueled by rising global commodity prices, especially on grain.  The 
remarks by the Financial Supervision Agency Deputy Chairman 
Baimukhanova on possible economic risks in 3-5 years' time echo 
another aspect of Kazakhstan's economic reality: the country, with 
its strong record of prudent fiscal and monetary
policies, is 
well-positioned to withstand substantial economic shocks-- as long 
as commodity prices remain high.  On this front, Kazakhstan appears, 
for now, to have little reason to worry. 
 
ORDWAY

Wikileaks

08ASTANA4, PRESIDENTIAL VISIT SIGNALS HEIGHTENED TURKISH

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Reference ID Created Released Classification Origin
08ASTANA4 2008-01-03 13:40 2011-08-30 01:44 UNCLASSIFIED//FOR OFFICIAL USE ONLY Embassy Astana

VZCZCXRO3953
RR RUEHLN RUEHVK RUEHYG
DE RUEHTA #0004 0031340
ZNR UUUUU ZZH
R 031340Z JAN 08
FM AMEMBASSY ASTANA
TO RUEHC/SECSTATE WASHDC 1439
INFO RUCNCIS/CIS COLLECTIVE 0350
RUEHAK/AMEMBASSY ANKARA 2116

UNCLAS ASTANA 000004 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
STATE FOR SCA/CEN (M. O'MARA) 
 
E.O. 12958: N/A 
TAGS: PGOV PREL KZ
SUBJECT: PRESIDENTIAL VISIT SIGNALS HEIGHTENED TURKISH 
FOCUS ON KAZAKHSTAN 
 
 
1.(SBU) Summary: President Abdullah Gul of Turkey met with 
President Nazarbayev and representatives of Kazakhstan's 
business community during his December 13-14 trip to Astana. 
Gul encouraged Kazakhstan's participation in Turkey's 
pipeline projects and discussed investment opportunities. 
Gul also asked President Nazarbayev for assistance in drawing 
Turkmenistan and Uzbekistan into a dialogue among 
Turkic-language countries.  A Turkish diplomat told Poloff 
that Gul's visit is part of Turkey's effort to increase its 
focus on Kazakhstan and Central Asia.  End Summary 
 
2. (SBU)  President Abdullah Gul of Turkey, accompanied by 
the country's Ministers of Defense and Energy and a large 
commercial delegation, travelled to Kazakhstan for meetings 
in Astana on December 13-14. Gul met with President 
Nazarbayev and sought support for Turkey's pipeline projects, 
including Baku-Tbilisi-Ceyhan and Samsun-Ceyhan. Orhan Isik, 
the Head of Turkey's Liaison Office in Astana, told Poloff 
that Nazarbayev expressed a continued interest in a 
trans-Caspian pipeline.  Nazarbayev added, however, that 
Turkmenistan and Azerbaijan must settle their differences. 
According to Isik, Nazarbayev also reaffirmed that Kazakhstan 
intends to build a refinery in Ceyhan.  Gul and Nazarbayev 
discussed the Kars - Tbilisi - Ahaklalaki railroad, with 
Nazarbayev promising to commit cargo to the railroad. 
 
3. (SBU) Isik described Nazarbayev as "pro-Turkey" with 
strong links to the country's leadership.  According to Isik, 
Nazarbayev owns a mansion in Anataliya which he travels to 
four to five times a year.  Nazarbayev was the first head of 
state to visit President Gul after his election, which is 
well-remembered by Gul because of the controversy surrounding 
his election, said Isik. 
 
4.  (SBU)  The Turkish government has faced domestic 
criticism for a failure to engage in Central Asia, said Isik, 
and is now looking to increase its involvement in the region. 
 A main purpose of Gul's trip, therefore, was to demonstrate 
to Kazakhstan Turkey's intent to strengthen bilateral 
relations.  Turkey also believes that Kazakhstan, and 
Nazarbayev, can help to establish a dialogue among 
Turkic-language countries.  Turkmenistan and Uzbekistan have 
been disinclined to participate in gatherings of Turkic 
countries, said Isik.  Turkey would like Kazakhstan's 
assistance in ensuring that the two countries participate in 
the next meeting of Turkic countries, scheduled for 
Azerbaijan in 2008.  Nazarbayev promised to engage 
Turkmenistan and Uzbekistan and also expressed interest in 
Turkey's idea to create a secretariat in Ankara for 
Turkic-language countries. 
ORDWAY

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